High-speed Internet has a long way to go in the US, especially in rural and suburban areas. According to various sources, the US (the very birthplace of the Internet) isn’t even in the top 10 for mobile or broadband download speeds.
However, many factors dictate the quality of a country’s Internet connection. Geographic size is a limiting factor, and the wide open spaces of the United States are a major obstacle. However, this is beginning to change. 5G and other wireless technologies are grabbing the spotlight as game changers, but broadband is also about to get a big upgrade.
A two-chip stock may be the best way for investors to cash in. Here’s why.
Broadcom. An overlooked giant in the communications world
A cable giant Comcast: (CMCSA: -0.40%), which operates its Internet services under the Xfinity brand, will begin deploying next-generation broadband Internet in the second half of 2023. Comcast currently offers Internet download speeds of up to 1.2 Gbps (gigabits per second) nationwide. Comcast delivers this through its DOCSIS 3.1 technology (Data Over Cable Service Interface Specifications). But Comcast is gearing up for DOCSIS 4.0, which it believes could deliver speeds of up to 6.0 Gbps to more than 50 million locations by 2025.
Charter communications (CHTR: -0.34%) It also tested DOCSIS 4.0 for its rural focused Internet service. The upgrades will come in waves and should be completed by 2025, bringing speeds of up to 5 Gbps to the vast majority of households it can serve, and up to 10 Gbps for select business customers willing to pay for it. : Charter recently said its plan would cost up to $5.5 billion.
DOCSIS 4.0 is out there Broadcom: (AVGO: -0.34%) The chip giant has been working on this Internet infrastructure technology for years and has been testing modems and other equipment with Comcast for the past few years in preparation for a major network upgrade. Broadcom designs silicon for everything from connectivity chips for smartphones and other devices to the actual network infrastructure. Suffice it to say, faster internet services could be a big deal for Broadcom.
Much of Broadcom’s business comes from such large commercial projects, especially data centers (both for private business use and public cloud data centers) that are also needed for Internet infrastructure. Broadband-specific sales accounted for about 11% of total revenue last quarter, growing at a 20% year-over-year pace. To begin in 2023, Broadcom expects this segment to grow by about 30%. Clearly, sales to Comcast and other Internet service providers are starting to heat up.
With consumer electronics purchases currently in steep decline, Broadcom’s steady sales to businesses buck the trend. As new US broadband upgrade projects begin in earnest in 2023, Broadcom is poised to win a lot of business. The stock trades at less than 13 times forward one-year earnings and currently pays a 3.3% annual dividend.
MaxLinear. A small but soon to be mighty name in communication technology.
If Broadcom is a giant of the chip industry that goes largely unnoticed, the name MaxLinear: (MXL: -2.18%) maybe even less familiar to you. It’s a small chip designer with a market capitalization of just under $2.7 billion. Like Broadcom, you rarely see the MaxLinear logo on any device, but it’s all over the Internet infrastructure and communications equipment space. CEO Kishore Sendripu previously worked at Broadcom before co-founding MaxLinear in 2003.
The company has bought other silicon design operations over the years, including a small wireless network exploration business from Broadcom in 2016. The company is steadily developing its Internet network technology and expects new business from the upcoming upgrade phase to DOCSIS 4.0. Various Internet service providers, including related WiFi connectivity solutions (such as modems) that households and businesses will need to connect to the Internet.
As with all small businesses, MaxLinear’s larger partners present the greatest risks. Indeed, the company continues to work with Broadcom, making comments as far back as 2018 during the Federal Trade Commission’s review of Broadcom’s monopoly over various broadband Internet silicon projects. Anyway, MaxLinear is holding on. Revenue rose 29% to $830 million in the first nine months of 2022, while the company generated $294 million in free cash flow along the way.
MaxLinear is also in the process of acquiring a memory controller chip designer Silicone movement (SIMO: 1.94%) $3.8 billion in cash and new stock. MaxLinear believes that adding Silicon Motion to the mix will immediately improve the profitability of the new company. The deal is expected to close in mid-2023.
Concerns are growing about a recession in 2023, but MaxLinear may continue to do well as Comcast, Charter and others work to bring better Internet connectivity to homes and small businesses. The stock trades at just 9.5 times trailing 12-month free cash flow and just 8.7 times year-ago earnings. The designer of this tiny chip is worth a deeper dive as it is being prepared for next-generation Internet services.
