Is MaxLinear, Inc. a Buy?

By Markets Fool.com

Image source: MaxLinear.

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It's no secret people are demanding an increasing amount of video content be delivered to them digitally. This includes things like Netflix, YouTube, Hulu, and Amazon. Not only more content, but higher definition as well.

This is where MaxLinear comes in. A producer of radio frequency (RF) and mixed-signal circuits, its products are used in cable, satellite, broadband, and fiber optic networks. The company's chips are found in set-top boxes, receivers, satellites, and a wide variety of other networking equipment where signals need to be processed in order to display video or other data.

Fatter pipes
In recent company presentations, MaxLinear likes to point out all of the increased content people want to view and watch, along with the higher definition, is creating a need for "fatter pipes" to the home. In other words, more content demanded means more chips to deliver and process that content.

Compounding this is many homes now have multiple screens connected to their home networks. Everyone in the family wants to watch or do different things simultaneously. MaxLinear expects to take advantage of this trend with its data gateway products, especially over the next few quarters as major cable operators ship out their latest platform.

All of this translates to big growth numbers, both realized and looking ahead. Already MaxLinear has put up some impressive figures, growing revenue from $72 million in 2011 to $300 million in 2015, a compound annual growth rate of 43%! More impressive is that growth came largely in the last year, jumping 125% from 2014 to 2015.

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The party doesn't seem to be over yet, either. Management estimates the total serviceable addressable market (or SAM -- the portion of the total addressable market a company believes it can actually reach with its sales force) will increase 250% between 2014 and 2018.

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Most of the company's growth has been driven organically. In fact, the five-year compound annual growth rate for revenue from 2009 to 2014 was 21%. But the company has more recently benefited from its big acquisition of Entropic Communications, a similar developer of chips for the cable and satellite TV market.

It paid $287 million in cash and stock for the company, avoiding the use any debt. In fact, the company does not have any debt on its balance sheet at all and has $111 million in cash. The acquisition is almost complete and should continue driving growth through this year.

Analysts are expecting revenue to grow 42% this next quarter and 32% for the year. Adjusted earnings are expected to show an eye-popping 95% growth this quarter, and a still-respectable 26% for the year.

The upside and downside of being small
The main risk I see to this stock is its small size, yet it is simultaneously its main advantage and what I like about it. At only a $1.2 billion market cap, I believe this is one of those lesser-known tech stocks that has the potential to deliver some nice gains as it gets noticed by larger institutional investors.

But the small size also means it is competing against some big heavyweights with more marketing and R&D resources. According to its annual report, MaxLinear competes against big boys like Broadcom Limitedand to a lesser extent NXP Semiconductors NV, with market caps of $60 billion and $30 billion, respectively.

The other thing to be aware of with small, high-growth companies is valuation. Thankfully this doesn't seem to be as big of a risk for MaxLinear, with a forward price-to-earnings ratio of only 11.6, compared to 21.7 for the semiconductor industry.

However, those earnings are analyst-adjusted and not GAAP. Yet MaxLinear is around a 3 times price-to-sales ratio. Compare that to Texas Instruments, which trades over a 4 times price-to-sales ratio, even though sales and earnings growth are virtually flat.

MaxLinear is the kind of small-cap semiconductor maker I like to see. It has already been executing and growing well, and is set up to take advantage of a big trend and growing market. To top it off, the stock has been gaining momentum, but still doesn't look too expensive or risky.

The article Is MaxLinear, Inc. a Buy? originally appeared on Fool.com.

Chris Kuiper has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Amazon.com, Netflix, and NXP Semiconductors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.