Inphi Shares Pricing In Significant Growth In Data Center And Optical

There is a long list of companies in the chip and networking space leveraged to meaningful growth in optical deployments (long-haul and metro) and expanding adoption of higher-speed networking technologies in the data center. Inphi (IPHI) is uncommonly focused on this market; while adoption of 200G and 400G technologies is important to Mellanox (MLNX), Broadcom (AVGO), Finisar (FNSR), MACOM (MTSI), MaxLinear (MXL), and Semtech (SMTC) to varying degrees, Inphi is intensely focused on DSPs, drivers, TIAs, and PHYs used by equipment companies like Cisco (CSCO), Huawei, as well as hyperscale data center customers like Microsoft (MSFT) and Amazon (AMZN), and lacks the diversification of rivals like Broadcom.

There have been more than a few bumps in the road for Inphi, as data center deployments haven’t always matched up with bullish projections, and the company has been vulnerable to volatile spending patterns in markets like Chinese optical deployments. What’s more, the shares aren’t exactly cheap, as they already factor in meaningful revenue acceleration over the next three years and significant margin expansion. While Inphi does have strong technology and engineering capabilities, and I believe there is likely an M&A “backstop” to valuation, the markets Inphi participates in are intensely competitive.

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Inphi Shares Pricing In Significant Growth In Data Center And Optical

Semtech Outperforming As The Pieces Come Together

With stronger than expected results in industrial, handsets, data center, and optical, the pieces of Semtech’s (SMTC) growth story have come together a lot quicker than I’d expected. Add in some operating margin leverage and the shares are up about 15% in just the last three months (and up close to 60% over the last year), handily outperforming the SOX index and peers/rivals like Maxim (MXIM), MACOM (MTSI), Inphi (IPHI), and ON Semiconductor (ON) over those time periods.

I didn’t expect this level of outperformance so soon from Semtech, but I can see why the Street is bullish on the prospects for the second half of the year, given the company’s leverage to data center and optical, as well as improving trends for handsets and the ongoing growth opportunity in Long Range Access (or LoRa). I’m not completely comfortable paying more than 5x forward revenue for Semtech today, those margins are improving and this is shaping up as a relatively rare double-digit revenue growth story with M&A support.

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Semtech Outperforming As The Pieces Come Together

Washed Out Expectations Should Help MaxLinear From Here

It tells you something about the level of confidence the market had in a company when it announces that the next quarter’s revenue will be 20% lower than expected (and 25% lower relative to expectations just a month or so before) and the stock basically shakes it off in a few hours. Such was the case with MaxLinear (MXL), a recent serial disappointer in the semiconductor space that has repeatedly lowered expectations in recent quarters, but where there’s still some measure of confidence that 2019 and 2020 will see a significant ramp in new advanced products.

As I’ve written in the past on MaxLinear, I expected 2018 to be a forgettable year (although not this bad), and I still see opportunities for the company to pick up business in MoCA, wireless backhaul, and DOCSIS 3.1 in 2019 and 2020, with hyperscale data center interconnects also chipping in late in 2019 and into 2020. I believe MaxLinear shares can support a low $20s fair value today, but a lot of management credibility is resting on this third quarter being the worst point of the cycle and revenue ramping up from there.

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Washed Out Expectations Should Help MaxLinear From Here

Semtech Has Made Progress, But Really Needs LoRa To Take Off

I wasn’t a big fan of seemingly perennial underachiever Semtech (SMTC) back in 2016, and the path since then hasn’t been entirely smooth. The company has done a little better than I’d expected with revenue (beating my circa-2016 expectations by 3% in the last two years), but adjusted free cash flow has been slow to develop, and the company’s key driver, LoRa, has come in well short of management’s targets from a few years ago.

With a strong move in the shares since the last quarter, the stock’s performance has been slightly better than the SOX since my last update, on par with Silicon Labs (SLAB), and below ON Semiconductor (ON) (and well above Maxim (MXIM) and MACOM (MTSI)), but I don’t feel like I’ve missed much with slightly-better-than-sector performance. I’m more encouraged by what I’ve seen recently in the data center and PON businesses, as well as protection, but a lot is riding on increased uptake/usage of LoRa. I’d also note that while I don’t see tremendous value here, the shares have appeal as a takeout candidate.

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Semtech Has Made Progress, But Really Needs LoRa To Take Off