MACOM Technology Solutions Holdings (NASDAQ:MTSI) received fairly the scare when the inventory collapsed shortly after the discharge of the Q2 report. While MTSI surpassed estimates for the highest and the underside line, steerage got here in effectively under expectations, pushed by a serious decline in new buyer orders and outright cancellations. However, the inventory rapidly recovered and has been on the transfer since. Why will probably be coated subsequent.

The inventory collapses after a stable begin

The chart under reveals how the second quarter of 2023 has been a catastrophe for MTSI. MTSI received off to a stable begin in 2023 with the fill up 12.5% by the tip of Q1, just for the inventory to break down in Q2 with the inventory dropping as a lot as 31.5% by May 4. The inventory has since bounced, however the inventory remains to be down 6% YTD.

There are a few necessary issues value noting within the chart. Note how the inventory spent a lot of March attempting to get by way of the $70-75 area. There have been repeated makes an attempt, however the inventory was unable to interrupt what seems to be resistance. Recall how the inventory additionally stalled when it received to the $70-75 area in November and December 2022.

For the inventory to reverse course on quite a few events in the identical worth area is not any coincidence, however proof of the presence of resistance within the $70-75 area. Similarly, it’s no coincidence the inventory bounced on May 4 when it hit an intraday low of $48.53 as a result of that is one thing that has occurred earlier than within the $47.50-52.50 area.

For occasion, the rally from mid-October to mid-November that noticed the inventory admire by as a lot as 49% began after the inventory fell to $48.76 on October 13, which occurs to be in the identical aforementioned $47.50-52.50 area and actually fairly near the May 4 low of $48.53. Note additionally how the rally stalled when the inventory hit a excessive of $72.64 on November 15, which occurs to be within the $70-75 area talked about beforehand.

Going again even additional in time reveals quite a few cases of the inventory bouncing as soon as it received to the $47.50-52.50 area. For instance, the rally from May 2021 to November 2021 began when the inventory hit a low of $48.68 on May 14, 2021, which is simply $0.08 lower than the October 2022 low of $48.76 and $0.15 greater than the May 2023 low of $48.53. So there’s substantial proof pointing to help within the $47.50-52.50 area, simply as there’s substantial proof pointing to resistance within the $70-75 area.

The inventory is basically caught between help and resistance. The inventory is ready to transfer increased, however solely to a sure diploma as the best way up is blocked by the latter. Similarly, the inventory is ready to transfer decrease, however solely to a sure diploma as the best way down is blocked by the previous. All this implies continued sideways motion within the close to time period, regardless of some ups and downs.

Those concerned with a commerce might take into account going lengthy MTSI when the inventory will get near help within the $47.50-52.50 area, solely to get out if it will get near resistance within the $70-75 area and vice versa. MTSI is at present in no man’s land after the inventory closed at $59.18 on May 19, which is roughly midway between the $47.50-52.50 area and the $70-75 area, or midway between help and resistance.

The prospect of a trough offsets bearish steerage

As talked about earlier, the inventory hit the 2023 low of $48.53 on May 4, which is when MTSI launched its Q2 FY2023 report. MTSI disenchanted with steerage that was far under expectations, triggering a selloff within the inventory that noticed the inventory drop by as a lot as 15% on the low. On the opposite hand, the inventory recovered most of its losses earlier than the tip of the day to shut down simply 3.8%.

There is a motive for this comeback. Support got here into play, however there’s extra to it. While steerage was a disappointment, there was sufficient elsewhere to recommend a restoration may not be thus far into the long run. The Q2 outcomes truly beat estimates with income rising by 2.6% YoY to $169.4M, $1.4M greater than anticipated. Industrial and protection contributed $77.2M, telecom one other $53.9M and datacenter accounted for the remaining $38.3M. Non-GAAP EPS elevated by 16.2% YoY to $0.79, $0.01 greater than anticipated. The desk under reveals the numbers for Q2 FY2023.

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Source: MTSI Form 8-K

Nevertheless, the Q2 outcomes characterize a sequential decline in comparison with Q1. Furthermore, this decline is forecast to proceed with steerage calling for Q3 FY2023 income of $145-150M, a decline of 12.9% QoQ and 14.4% YoY on the midpoint. In comparability, consensus estimates have been anticipating $166M. The forecast expects non-GAAP EPS of $0.52-0.56, decline of 31.7% QoQ and 26.0% YoY on the midpoint.

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Q3 steerage was a lot worse than anticipated, which is why administration added some colour on the problem. Book-to-bill was under one at simply 0.5 in Q2, which is lower than half the 1.1 for all of FY2022 and effectively under MTSI’s personal expectations. Quite a lot of orders have been canceled outright, an indication of a weak demand surroundings. From the Q2 earnings name:

“Given the extraordinarily weak Q2 bookings, I thought it would be helpful to discuss the current order trends and address a series of important questions. First, were we surprised with the weak Q2 bookings. As discussed on last — on our last earnings call, we had anticipated that bookings would be weak in Q2. However, our actual bookings were approximately $40 million below our internal forecast. So while we expected some softness, we did not expect the magnitude of weakness in the number of cancellations that occurred during the quarter. What caused the weak bookings, we believe a combination of excess customer and channel inventory as well as pockets of short-term end demand weakness.”

A transcript of the Q2 FY2023 earnings call can be found here.

However, MTSI did somewhat offset the weak Q3 guidance with the prospect of improvement starting in Q4.

“Finally, as we model our second half financials, we expect our full year FY ‘23 revenues and earnings to be down approximately 4% to 5% and gross margins to be over 60%.”

The outlook for FY2023 calls for a decline of 4-5% YoY in revenue, which implies Q4 revenue of around $147.5-150.0M since FY2022 revenue was $675.2M and Q3 guidance calls for revenue of $494.5-499.5M in Q1-Q3. While this is a small sequential improvement, it’s better than the big sequential declines in the preceding quarters.

“So when we add all of that up and then we look at our sales forecast, we do think things will slowly improve. We don’t think it’s going to be a rapid return to, let’s say, strong bookings because we do have to work through the inventory situation that we’re currently looking at. So I think I — the comments that I made in my prepared remarks about the trends improving is probably as far as I want to go. We don’t know what Q4 bookings will be. We’ll have to wait and see.

There is certainly a lot of uncertainty around the markets. But I think what’s very important for today is investors understand that we’re sitting on a very strong backlog. And when we apply a conservative book-to-bill on top of that, we think year-over-year, we should be able to achieve between 4% and 5% decline in revenue, which is not ideal, but I think it’s a reasonable outcome given the market environment.”

Consensus estimates have been revised according to the latest outlook from MTSI. Estimates predict non-GAAP EPS of $2.63-2.70 on revenue of $644-647M by the end of FY2023, which represent YoY declines of 4.3-6.7% and 4.3-4.6% respectively. At the same time, while FY2023 is expected to be a down year compared to FY2022, most do not expect things to get much worse in FY2024.

Estimates predict non-GAAP EPS of $2.48-2.81 on revenue of $640-673M in FY2024, which is rather similar to FY2023. For revenue and earnings to stay flat argues in favor of a stock that is going sideways.

MTS is neither expensive nor cheap

Valuations are also in favor of sideways action in the stock. The table below shows some of the multiples MTSI trades at. In general, MTSI trades at higher multiples than most in the sector, although multiples are also not in lofty territory. For instance, MTSI trades at 22.1 times forward non-GAAP earnings with a trailing P/E of 19.1. In comparison, the median in the sector is 20.9x and 18.2x respectively.

Note the trailing GAAP P/E ratio of 12.9. While this seems low and is in fact much lower than the median of 23, it’s worth mentioning that this low number is due to GAAP net income of $239.3M or $3.36 per share in Q4 FY2022, which was in turn mostly the result of a $200M tax benefit. Thanks to this, GAAP EPS in the last 12 months was $4.58, which helped push down the P/E ratio for MTSI.

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Source: Seeking Alpha

Investor takeaways

I’m impartial on MTSI inventory as said in a previous article. While there may be volatility along the way with ups and down, the general direction of the stock is likely sideways, at least in the near term. Whether it is valuations, flat growth or chart patterns, there are several reasons why the stock will find it difficult to make much headway in the near term.

Guidance was well below expectations amid a weak demand environment, but the outlook sees the decline coming to a halt as soon as Q4. The top and the bottom line are expected to remain relatively stable once the trough in Q3 is in the rear view. FY2023 and FY2024 are expected to be in the same ballpark. MTSI is also sitting on $300M worth of backlog, which gives it some cushion to work with.

The numbers staying stable should help prevent a bigger selloff in the stock, although it might also put a cap on any potential rallies. While the stock has dropped significantly in recent weeks, the charts suggest to expect MTSI to trade within a range. On the one hand, support has held its ground. On the other hand, resistance is still out there and the stock remains stuck between support and resistance. Sideways action within a range bounded by support in the $47.50-52.50 region and resistance in the $70-75 region looks like the most likely outcome under these circumstances.

Bottom line, apart from merchants who know methods to navigate the lows and the highs within the inventory, most are in all probability unlikely to be swayed by the prospect of a inventory going sideways. If return on funding is necessary within the close to time period, then MTSI is probably going not it. MTSI might make for a greater case down the road, however not in the mean time.