This chip stock has lost nearly half its value. I'm making a high-risk bet on a rebound
I’m always looking for opportunities where the potential upside is much greater than the downside. I see one now in MaxLinear Inc. The Carlsbad, California-based semiconductor company doesn’t make AI chips. It makes the chips that connect servers inside massive data centers, allowing them to exchange information at incredibly high speeds. Founded in 2003, MaxLinear generated about $468 million in revenue last year. Its technology is also used in wireless infrastructure and consumer electronics, with customers including Dell, Meta, Comcast and Vodafone. Key points Delivered strong earnings, with revenue jumping 72%. Its high-speed connectivity business is booming as demand from AI data centers accelerates. Fears of data center restrictions have made the stock a bargain. The stock had a phenomenal run this year, climbing as much as 635% at its peak. But shares have since lost roughly 45% of their value, even after the company delivered a strong earnings report. I think that sell-off has created an interesting trading opportunity. Why I’m buying The company just delivered a great quarter Revenue jumped 72% from a year earlier, MaxLinear beat profit expectations and management forecast fourth-quarter revenue of $240 million to $260 million. That would represent as much as 19% growth from the third quarter. That’s an impressive combination. We’re talking about a company growing sales rapidly and expecting even more growth ahead. Yet despite those strong results, the stock remains well below its recent high. MXL YTD mountain MaxLinear, YTD AI data center demand is driving crazy growth Everyone talks about the AI chips powering data centers, but those chips aren’t much use if the servers can’t communicate quickly enough. That’s where MaxLinear comes in. Its high-speed connectivity technology helps move large amounts of data between servers, making it a key part of the infrastructure supporting AI. Sales in the company’s connectivity business have more than tripled, and its order visibility reportedly extends into 2028. As data centers become larger and more complex, the need for faster connectivity will only grow. The market is overreacting to fear This comes down to sentiment. Investors are worried that restrictions on new data center construction could slow the AI infrastructure boom . Because MaxLinear supplies technology used in those facilities, its stock has been caught up in that fear. But there’s an important distinction between worrying about future restrictions and having actual bans in place. Investors may be pricing in a much worse outcome than the evidence currently supports. That doesn’t mean the concerns are completely unfounded. But when a stock gets cut roughly in half despite strong earnings and accelerating demand, I start paying attention. That’s where the asymmetric opportunity comes in. Why now? MaxLinear’s pullback has been dramatic. After climbing as much as 635% earlier this year, the stock has fallen roughly 45% from its 52-week high. At around $71 a share, I see a compelling opportunity. The average analyst price target of $89 implies roughly 32% upside, while Morgan Stanley’s high-end target of $125 points to nearly 85% upside. Bottom line This is a trade, not a stock I’d buy and forget about. Shares have already had an enormous run this year, and the selling could continue. I wouldn’t rule out another 30% decline if fears surrounding data center development persist. There’s also a financial risk worth watching. MaxLinear has made advance payments to secure supply and borrowed against its credit line to support growth. That means some of the company’s reported profit hasn’t translated into cash yet. If demand slows, those commitments could become a problem. That’s why I’d use stop-loss orders to manage my risk rather than simply ride out a steep decline. Steven Grasso is the CEO of Grasso Global Inc. He began his finance career in 1993 on the trading floor of the NYSE, rising to Executive Floor Official and Governor. Disclosures: Grasso does not own shares personally or through the firm. All opinions expressed by the [CNBC Pro contributors] are solely their opinions and do not reflect the opinions of CNBC, or its parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. This content is provided as part of our editorial output for informational purposes only and does not constitute financial, investment, tax or legal advice or a recommendation to buy any security or other financial asset. The content is general in nature and does not reflect any individual’s unique personal circumstances. The above content might not be suitable for your particular circumstances. Before making any financial decisions, you should strongly consider seeking advice from your own financial or investment advisor. 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