New Orders And Government Funding Will Expand Opportunities In RF And Millimeter Wave Technologies

Key Takeaways

• Strategic acquisitions and U.S. funding expand MACOM's market opportunities, potentially boosting revenue and earnings.
  
• Focus on new products and fab efficiency could enhance net margins and drive future earnings growth.
  
• Weak Telecom and Industrial demand, along with transition delays and market volatility, may impact revenue growth and operational efficiency.

Catalysts

Designs and manufactures analog semiconductor solutions for use in wireless and wireline applications across the radio frequency (RF), microwave, millimeter wave, and lightwave spectrum.

• MACOM was awarded several large purchase orders and contracts, which are expected to support growth over the next 12 months and beyond. This is likely to impact revenue positively.
  
• The company is expanding its leadership position in high-performance connectivity solutions, particularly with significant growth in Data Center revenue, suggesting future revenue growth.
  
• MACOM's development of industry-leading microwave and millimeter wave frequency processes, supported by U.S. government funding, could lead to revenue growth and improved net margins.
  
• The recent strategic acquisitions increase MACOM's serviceable addressable market, potentially enhancing revenue and earnings through expanded market opportunities.
  
• MACOM is focusing on new product introductions and improvements in fab utilization, which could drive efficiency gains and improve net margins and earnings.

MACOM Technology Solutions Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming MACOM Technology Solutions Holdings's revenue will grow by 13.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 10.5% today to 23.1% in 3 years time.
• Analysts expect earnings to reach $248.6 million (and earnings per share of $3.29) by about December 2027, up from $76.9 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 56.2x on those 2027 earnings, down from 130.0x today. This future PE is greater than the current PE for the US Semiconductor industry at 32.1x.
• Analysts expect the number of shares outstanding to grow by 1.49% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.13%, as per the Simply Wall St company report.

MACOM Technology Solutions Holdings Future Earnings Per Share Growth

Risks

• Weakness in Industrial and certain Telecom submarkets could impact overall revenue growth, given that these areas are showing less demand than others.
  
• Shortfalls in introducing new IC products and issues with the optimization of low wafer fab utilization may hinder operational efficiency and impact net margins.
  
• Decreased global 5G spending, with weak demand from Europe and India, could affect Telecom revenue growth, particularly if the anticipated benefits from the North American market don't fully materialize.
  
• The ongoing lull in demand due to the transition from DOCSIS 3.1 to DOCSIS 4.0 could suppress revenue growth in the cable TV market if the transition lingers longer than expected.
  
• High levels of volatility and constant shifts in Data Center market dynamics pose risks to consistent revenue and earnings growth, especially if recent growth fails to sustain at expected rates.

Valuation

• The analysts have a consensus price target of $147.46 for MACOM Technology Solutions Holdings based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $160.0, and the most bearish reporting a price target of just $105.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $1.1 billion, earnings will come to $248.6 million, and it would be trading on a PE ratio of 56.2x, assuming you use a discount rate of 8.1%.
• Given the current share price of $137.97, the analyst's price target of $147.46 is 6.4% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.