Faster internet is coming to rural US, and these 2 chip stocks could be big winners – The Motley Fool

Faster internet is coming to rural US, and these 2 chip stocks could be big winners - The Motley Fool

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 birthplace of the internet) is not even in the top 10 for mobile or broadband internet download speeds.

However, there are many factors that determine the quality of a country’s Internet connection. Geographical size is a limiting factor, and the wide open spaces in the United States are a major obstacle. However, this is starting to change. 5G and other wireless tech are in 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 make money. This is why.

Broadcom: an overlooked giant in the communications world

Cable giant Comcast (CMCSA -0.40%), which operates its internet services through 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 through its DOCSIS 3.1 (Data Over Cable Service Interface Specifications) technology. But Comcast is preparing for DOCSIS 4.0, which it believes could provide speeds of up to 6.0 Gbps in more than 50 million locations by 2025.

Charter communication (CHTR -0.34%) also tested DOCSIS 4.0 for its rural-focused Internet service. Upgrades will come in waves and should be completed by 2025, bringing top speeds of up to 5 Gbps for 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 announced that the plan will cost up to $5.5 billion.

DOCSIS 4.0 is true Broadcom (AVGO -0.34%) comes in. The chip giant has been working on this Internet infrastructure technology for years and has spent the last few years testing modems and other hardware with Comcast in preparation for major network upgrades. Broadcom designs silicon for everything from smartphone and other device connectivity chips to actual network infrastructure. Suffice to say, faster internet service could be a big deal for Broadcom.

The majority of Broadcom’s business stems from large commercial projects such as these, especially data centers (both on-premises for private business use and public cloud data centers), which are also necessary for Internet infrastructure. Specific broadband internet sales amounted to approximately 11% of total revenue last quarter, grow by 20% year on year. Before kicking off 2023, Broadcom expects this segment to grow by about 30%. Clearly, sales to Comcast and other Internet service providers are starting to heat up.

Of consumer electronics purchases are in a serious slump right now, Broadcom’s steady sales to enterprises are going against the trend. With new broadband upgrade projects in the US starting in earnest in 2023, Broadcom is poised to land a lot of business. The shares trade for less than 13 times future earnings over a year and currently pay a dividend of 3.3% annualized.

MaxLinear: small but soon to be mighty name in communication technology?

If Broadcom is a chip industry giant that goes largely unnoticed, the name Max Linear (MXL -2.18%) perhaps even less known to you. This is a small chip designer with a market cap of less than $2.7 billion. Like Broadcom, you rarely see a MaxLinear logo on devices, but it’s all over the Internet infrastructure and in the connectivity device space. CEO Kishore Seendripu worked at Broadcom before co-founding MaxLinear in 2003.

The company has purchased other small silicon design operations over the years, including a small wireless network backhaul business from Broadcom in 2016. The company has been steadily building its internet network technology and looks forward to new business from the upcoming upgrade cycle to DOCSIS 4.0 by various internet service providers – including related WiFi connectivity solutions (such as modems) required for households and businesses to connect to the Internet.

As with all small businesses, MaxLinear’s larger peers pose the greatest risks. Indeed, the company continues to engage with Broadcom, making comments in 2018 during a Federal Trade Commission review of Broadcom’s monopoly on various broadband internet silicon designs. In any case, MaxLinear has stood its ground. Revenue increased 29% to $830 million in the first nine months of 2022, and the company generated free cash flow of $294 million.

MaxLinear is also in the process of acquiring the memory controller chip designer Silicon movement (SIMO 1.94%) for $3.8 billion in cash and new shares. MaxLinear believes adding Silicon Motion to the mix will immediately improve the new company’s profitability. The deal is expected to close in mid-2023.

Concerns about a 2023 recession are mounting, but MaxLinear could continue to do well as Comcast, Charter and others work to improve Internet connectivity for homes and small businesses. The shares trade for just 9.5 times after 12 months free money flow, and only 8.7 times expected earnings over a year. This little chip designer is worth a deeper dive as it prepares for the next generation of internet services.

Leave a Reply