2 Reasons to Like MTSI and 1 to Stay Skeptical

The past six months have been a windfall for MACOM’s shareholders. The company’s stock price has jumped 66.3%, hitting $207.04 per share. This was partly thanks to its solid quarterly results, and the run-up might have investors contemplating their next move.

Is it too late to buy MTSI? Find out in our full research report, it’s free.

Why Does MACOM Spark Debate?

Founded in the 1950s as Microwave Associates, a communications supplier to the US Army Signal Corp, today MACOM Technology Solutions (NASDAQ: MTSI) is a provider of analog chips used in optical, wireless, and satellite networks.

Two Positive Attributes:

1. Long-Term Revenue Growth Shows Strong Momentum

A company’s long-term performance is an indicator of its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Luckily, MACOM’s sales grew at a solid 12.8% compounded annual growth rate over the last five years. Its growth surpassed the average semiconductor company and shows its offerings resonate with customers. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions.

2. Outstanding Long-Term EPS Growth

We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.

MACOM’s EPS grew at 22.2% compounded annual growth rate over the last five years, higher than its 12.8% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

One Reason to be Careful:

Previous Growth Initiatives Haven’t Impressed

Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Although MACOM has shown solid fundamentals lately, it historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 11.9%, somewhat low compared to the best semiconductor companies that consistently pump out 35%+.

Final Judgment

MACOM’s positive characteristics outweigh the negatives, and after the recent rally, the stock trades at 47.5× forward P/E (or $207.04 per share). Is now a good time to buy despite the apparent froth? See for yourself in our in-depth research report, it’s free.

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