MACOM currently trades at $137.94 and has been a dream stock for shareholders. It’s returned 451% since December 2019, blowing past the S&P 500’s 92.7% gain. The company has also beaten the index over the past six months as its stock price is up 34.1%.
Is now the time to buy MACOM, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.We’re glad investors have benefited from the price increase, but we don't have much confidence in MACOM. Here are three reasons why MTSI doesn't excite us and a stock we'd rather own.
Why Is MACOM Not Exciting?
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.
1. Lackluster Revenue Growth
We at StockStory place the most emphasis on long-term growth, but within semiconductors, a stretched historical view may miss new demand cycles or industry trends like AI. MACOM’s recent history shows its demand slowed as its annualized revenue growth of 4% over the last two years is below its five-year trend. 
2. Free Cash Flow Margin Dropping
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.
As you can see below, MACOM’s margin dropped by 9.8 percentage points over the last five years. If its declines continue, it could signal higher capital intensity. MACOM’s free cash flow margin for the trailing 12 months was 19.2%.
3. Previous Growth Initiatives Haven’t Paid Off Yet
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).
MACOM historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 9.2%, somewhat low compared to the best semiconductor companies that consistently pump out 35%+.
Final Judgment
MACOM isn’t a terrible business, but it doesn’t pass our bar. With its shares beating the market recently, the stock trades at 41.4× forward price-to-earnings (or $137.94 per share). Investors with a higher risk tolerance might like the company, but we think the potential downside is too great. We're fairly confident there are better stocks to buy right now. We’d recommend looking at The Trade Desk, the nucleus of digital advertising.
Stocks We Like More Than MACOM
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