Someone forgot to tell MaxLinear (MXL 0.72%) and Silicon Motion Technology (SIMO 1.60%) about the epic rebound in chip stocks. As measured by the iShares Semiconductor ETF, semiconductor shares are up over 35% since their low point in mid-October 2022. MaxLinear and Silicon Motion? Up a meager 11% since that time.  

The two companies are in the midst of a merger that's awaiting approval from regulators in mainland China. In the meantime, the current downturn in global chip sales has finally come for these two businesses. Can they rally in 2023?

A rebound the second half of 2023, but for whom?

It's no secret that many chip stocks have suffered a nasty downturn over the past year. PC and smartphone sales in particular are down big after consumer spending on tech devices eased after big spending early in the pandemic. More recently, a glut of memory chips has begun to impact some parts of the data center and business server market. 

That didn't prevent MaxLinear from closing out 2022 on a strong note. Fourth-quarter revenue was up 17% year over year to $291 million, driven by strong Wi-Fi connectivity, internet infrastructure build-outs, and other industrial applications. Full-year earnings per share (EPS) under generally accepted accounting principles (GAAP) notched a big rally as MaxLinear became more profitable with its larger scale. EPS for 2022 was up 192% to $1.55.  

Silicon Motion and its more greater focus on the digital memory market (memory chip controllers, to be specific) didn't fare quite so well. Q4 revenue declined 24% year over year to $201 million, although the company remains solidly profitable. EPS was $0.71 in Q4, down 42% year over year. Full-year EPS was down 19%.  

The main problem was guidance for the start of 2023. Though many of its peers in the semiconductor world are forecasting a rebound in the second half of 2023, both MaxLinear and Silicon Motion indicated their view on the year is "cloudy." Though its Wi-Fi business in particular is poised to have a big year, MaxLinear forecast revenue to be $240 million to $260 million in the first quarter of 2023. That implies as much as a 9% year-over-year decline. The profit margin will also likely take a step back.

In keeping with a company about to be acquired, Silicon Motion didn't provide specific financial guidance. It did, however, state that it's currently focused on implementing cost controls to protect profitability.

An update on that merger

I still have my doubts about whether China will give the green light to MaxLinear's proposed takeover of Silicon Motion. However, MaxLinear remains confident the deal will go through sometime in the middle of this year. If it does, it could still mean significant upside for Silicon Motion stock. The offer to Silicon Motion shareholders is $93.54 in cash, and 0.388 shares of MaxLinear for every share of Silicon Motion (as of this writing, worth $13.39, based on MaxLinear's price of $34.50).

Total value consideration is about $107, significantly higher than Silicon Motion's current stock price of $64.60. The market clearly still has its doubts about this merger being approved, too. Nevertheless, if it happens, Silicon Motion stock could be a decent bet right now.

What of MaxLinear's fate?

As for MaxLinear, management seems to have positioned the portfolio of silicon well for ongoing upgrades to Wi-Fi6 and, going forward, even more advanced Wi-Fi7. With internet and 5G wireless infrastructure upgrades still ongoing, MaxLinear could eventually return to growth, once this soft patch is cleared.

Silicon Motion could offer it further ability to diversify its offerings to enterprise customers, not to mention increase efficiency by being able to purchase wafers from suppliers like Taiwan Semiconductor Manufacturing at more favorable rates if the two companies can merge into a larger entity.  

Of course, MaxLinear could become a riskier enterprise if it does purchase Silicon Motion. It will be taking on debt to complete the acquisition. The balance sheet had $206 million in cash and short-term investments at the end of 2022, and debt of just $122 million -- but debt will go up significantly to purchase Silicon Motion at a premium to its current market capitalization of $2.1 billion.

Even when considering 2023 hiccups, though, MaxLinear could be a great long-term value. The stock currently trades for 22 times trailing-12-month EPS, or just 8.3 times trailing-12-month free cash flow. Expect headwinds to these profit metrics in the quarters ahead as the chip downturn begins to negatively impact MaxLinear. But I'm intrigued by this small chip stock at this juncture.

The market could be overlooking a big opportunity for it in the coming years, even if a rally for MaxLinear gets delayed in 2023.