High-speed internet has a long way to go in the U.S., especially in rural and suburban areas. According to various sources, the U.S. (the very birthplace of the internet) doesn’t even make it on the top 10 list for either mobile or broadband internet download speeds.
However, a lot of factors dictate the quality of a country’s internet connectivity. Geographic size is one limiting factor, and the wide open spaces in the States are a major hurdle. This is beginning to change, though. 5G and other wireless technology are capturing the spotlight as game-changers, but broadband is about to get some big upgrades too.
Two chip stocks could be the best way for investors to cash in. Here’s why.
Broadcom: An overlooked giant in the communications world
Cable giant Comcast (CMCSA -0.61%), which operates its internet services via the Xfinity brand, will begin deploying next-gen broadband internet in the second half of 2023. Currently, Comcast offers internet download speeds of up to 1.2 Gbps (gigabits per second) nationwide. Comcast delivers this via its DOCSIS 3.1 technology (Data Over Cable Service Interface Specifications). But Comcast is getting ready for DOCSIS 4.0, which it thinks can provide speeds of up to 6.0 Gbps to over 50 million locations by year 2025.
Charter Communications (CHTR 0.01%) has also been testing DOCSIS 4.0 for its rural-focused internet service. Upgrades will come in waves and should be complete by 2025, bringing top-tier speeds of up to 5 Gbps to the vast majority of households it can serve, and up to 10 Gbps for those select business customers willing to pay for it. Charter recently shared that its plan will cost up to $5.5 billion.
DOCSIS 4.0 is where Broadcom (AVGO -1.03%) comes in. The chip giant has been working on this internet infrastructure tech for years, and has been testing modems and other hardware with Comcast over the last couple of years in preparation for big network upgrades. Broadcom designs silicon for everything from smartphone and other device connectivity chips to actual network infrastructure. Suffice to say faster internet services could be a big deal for Broadcom.
The majority of Broadcom’s business comes from big commercial projects like this, especially data centers (both on-premises ones for private business use and public cloud data centers), which are also needed for internet infrastructure. Broadband internet-specific sales were about 11% of total revenue last quarter, growing at a 20% pace year-over-year. To kick off 2023, Broadcom expects this segment to grow about 30%. Clearly, sales to Comcast and other internet service providers are starting to heat up.
With consumer electronics purchases in a severe slump right now, Broadcom’s steady sales to enterprises is bucking the trend. As new U.S. broadband upgrade projects get underway in earnest in 2023, Broadcom is poised to win lots of business. The shares trade for less than 13 times one-year forward earnings, and currently pay a 3.3% annualized dividend.
MaxLinear: Tiny but soon-to-be-mighty name in communications technology?
If Broadcom is a chip industry giant that goes largely unnoticed, the name MaxLinear (MXL -0.43%) might be even less familiar to you. This is a small chip designer with a market capitalization of under $2.7 billion. Like Broadcom, you’ll rarely see a MaxLinear logo on any devices, but it’s all over the internet infrastructure and connectivity device space. CEO Kishore Seendripu used to work at Broadcom before co-founding MaxLinear back in 2003.
The company has purchased other tiny silicon design operations over the years, including a small wireless network backhaul business from Broadcom in 2016. The company has been steadily building up its internet network technology and is eyeing new business from the coming upgrade cycle to DOCSIS 4.0 by various internet service providers — including related WiFi connectivity solutions (like modems) that will be needed for households and businesses to connect to the internet.
As with all small businesses, MaxLinear’s larger peers pose the biggest risks. Indeed, the company continues to have run-ins with Broadcom, making comments back in 2018 during a Federal Trade Commission review of Broadcom’s monopoly over various designs for broadband internet silicon. At any rate, MaxLinear has been holding its own. Revenue was up 29% through the first nine months of 2022 to $830 million, and the company generated free cash flow of $294 million along the way.
MaxLinear is also in the process of acquiring memory controller chip designer Silicon Motion (SIMO -0.12%) for $3.8 billion in cash and new stock. MaxLinear believes adding Silicon Motion to the mix will immediately improve the new company’s profitability. The deal is expected to close by the middle of 2023.
Worry is mounting about a recession in 2023, but MaxLinear could continue to do well as Comcast, Charter, and others work on bringing better internet connectivity to homes and small businesses. The shares trade for just 9.5 times trailing 12-month free cash flow, and just 8.7 times one-year-forward expected earnings. This small chip designer is worth a deeper dive as it gears up for the next generation of internet services.