MACOM (MTSI)

Network chips maker MACOM Technology Solutions (NASDAQ: MTSI) reported Q1 CY2025 results topping the market’s revenue expectations, with sales up 30.2% year on year to $235.9 million. On top of that, next quarter’s revenue guidance ($250 million at the midpoint) was surprisingly good and 5.7% above what analysts were expecting. Its non-GAAP profit of $0.85 per share was in line with analysts’ consensus estimates.

Company Overview

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.

MACOMs peers and competitors include Analog Devices (NASDAQ:ADI), Texas Instruments (NASDAQ:TXN), Skyworks (NASDAQ:SWKS), Infineon (XTRA:IFX), NXP Semiconductors NV (NASDAQ:NXPI), Monolithic Power Systems (NASDAQ: MPWR), Marvell Technology (NASDAQ:MRVL), and Microchip (NASDAQ:MCHP).

Longer manufacturing duration allows analog chip makers to generate greater efficiencies, leading to structurally higher gross margins than their fabless digital peers. The downside of vertical integration is that cyclicality can be more pronounced for analog chipmakers, as capacity utilization upsides work in reverse during down periods. Read More. The semiconductor industry is broadly divided into analog and digital semiconductors. Digital chips are what most people think of as the brains of almost every electronic device. Their primary purpose is to either store (memory chips) or process (CPUs/GPUs) data. By comparison, analog chips regulate real world signals, such as temperature, speed, sound, or electrical current, converting them into a stream of digital data that can be processed by digital semiconductors. Analog semiconductors are also used to manage power in any electronic device; they convert, store and distribute the electrical energy that comes from a battery or wall plug. Analog chips are found everywhere from household appliances like refrigerators or washing machines, to smartphones, cars and factory production lines.

A company’s long-term sales performance can indicate its overall quality. Any business can have short-term success, but a top-tier one grows for years. Luckily, MACOM’s sales grew at an impressive 12.6% compounded annual growth rate over the last five years. Its growth beat the average semiconductor company and shows its offerings resonate with customers, a helpful starting point for our analysis. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions.

Long-term growth is the most important, but short-term results matter for semiconductors because the rapid pace of technological innovation (Moore's Law) could make yesterday's hit product obsolete today. MACOM’s annualized revenue growth of 9.9% over the last two years is below its five-year trend, but we still think the results suggest healthy demand.

This quarter, MACOM reported wonderful year-on-year revenue growth of 30.2%, and its $235.9 million of revenue exceeded Wall Street’s estimates by 2.6%. Beyond the beat, this marks 5 straight quarters of growth, implying that MACOM is in the middle of its cycle - a typical upcycle generally lasts 8-10 quarters. Company management is currently guiding for a 31.2% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 16.3% over the next 12 months, an improvement versus the last two years. This projection is admirable and suggests its newer products and services will fuel better top-line performance.

Days Inventory Outstanding (DIO) is an important metric for chipmakers, as it reflects a business’ capital intensity and the cyclical nature of semiconductor supply and demand. In a tight supply environment, inventories tend to be stable, allowing chipmakers to exert pricing power. Steadily increasing DIO can be a warning sign that demand is weak, and if inventories continue to rise, the company may have to downsize production.

This quarter, MACOM’s DIO came in at 180, which is 23 days above its five-year average, suggesting that the company’s inventory has grown to higher levels than we’ve seen in the past.

In the semiconductor industry, a company’s gross profit margin is a critical metric to track because it sheds light on its pricing power, complexity of products, and ability to procure raw materials, equipment, and labor.

MACOM’s gross margin is well ahead of its semiconductor peers, and its strong pricing power is an output of its differentiated, value-add products. As you can see below, it averaged an excellent 54.9% gross margin over the last two years. That means MACOM only paid its suppliers $45.11 for every $100 in revenue.

In Q1, MACOM produced a 55.2% gross profit margin, up 2.6 percentage points year on year. Zooming out, however, MACOM’s full-year margin has been trending down over the past 12 months, decreasing by 1.5 percentage points. If this move continues, it could suggest a more competitive environment with some pressure to lower prices and higher input costs (such as raw materials and manufacturing expenses).

Operating margin is one of the best measures of profitability because it tells us how much money a company takes home after procuring and manufacturing its products, marketing and selling those products, and most importantly, keeping them relevant through research and development.

MACOM was profitable over the last two years but held back by its large cost base. Its average operating margin of 10.7% was weak for a semiconductor business. This result is surprising given its high gross margin as a starting point.

On the plus side, MACOM’s operating margin rose by 3.2 percentage points over the last five years, as its sales growth gave it operating leverage.

This quarter, MACOM generated an operating profit margin of 14.8%, up 6.3 percentage points year on year. The increase was solid, and because its operating margin rose more than its gross margin, we can infer it was more efficient with expenses such as marketing, R&D, and administrative overhead.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

MACOM’s full-year EPS flipped from negative to positive over the last five years. This is a good sign and shows it’s at an inflection point.

In Q1, MACOM reported EPS at $0.85, up from $0.59 in the same quarter last year. This print beat analysts’ estimates by 1.1%. Over the next 12 months, Wall Street expects MACOM’s full-year EPS of $3.02 to grow 24.1%.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

MACOM has shown robust cash profitability, and if it can maintain this level of cash generation, will be in a fine position to ride out cyclical downturns while investing in plenty of new products and returning capital to investors. The company’s free cash flow margin averaged 21.5% over the last two years, quite impressive for a semiconductor business.

Taking a step back, we can see that MACOM’s margin dropped by 4.1 percentage points over the last five years. It may have ticked higher more recently, but shareholders are likely hoping for its margin to at least revert to its historical level. If the longer-term trend returns, it could signal increasing investment needs and capital intensity.

MACOM’s free cash flow clocked in at $30.53 million in Q1, equivalent to a 12.9% margin. This result was good as its margin was 5.7 percentage points higher than in the same quarter last year, but we note it was lower than its two-year cash profitability. Nevertheless, we wouldn’t put too much weight on a single quarter because investment needs can be seasonal, causing short-term swings. Long-term trends trump temporary fluctuations.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? 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 business quality lately, it historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 10.5%, somewhat low compared to the best semiconductor companies that consistently pump out 35%+.

Companies with more cash than debt have lower bankruptcy risk.

MACOM is a profitable, well-capitalized company with $681.5 million of cash and $540.2 million of debt on its balance sheet. This $141.3 million net cash position gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

It was great to see MACOM’s revenue guidance for next quarter top analysts’ expectations. We were also happy its revenue outperformed Wall Street’s estimates. Overall, we think this was a good quarter with some key metrics above expectations. The stock traded up 7.1% to $121.50 immediately following the results.

Updated: May 19, 2025 at 10:26 PM EDT

Before making an investment decision, investors should account for MACOM’s business fundamentals and valuation in addition to what happened in the latest quarter.

In our opinion, MACOM is a solid company. First off, its revenue growth was impressive over the last five years and is expected to accelerate over the next 12 months. And while its relatively low ROIC suggests management has struggled to find compelling investment opportunities, its astounding EPS growth over the last five years shows its profits are trickling down to shareholders. On top of that, its gross margins indicate it has pricing power.

MACOM’s P/E ratio based on the next 12 months is 32.6x. Looking at the semiconductor landscape right now, MACOM trades at a pretty interesting price. If you believe in the company and its growth potential, now is an opportune time to buy shares.

Wall Street analysts have a consensus one-year price target of $139.72 on the company (compared to the current share price of $125.65), implying they see 11.2% upside in buying MACOM in the short term.

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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