Positioning

Marvell: Well Positioned For Long-Term Performance And Potential Upside (NASDAQ:MRVL) – Seeking Alpha

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blackdovfx/E+ via Getty Images

blackdovfx/E+ via Getty Images
Marvell (NASDAQ:MRVL) stock is down -39.9% YTD and is now trading at $53.73/share. Fundamentals, however, didn’t change much in the past months as management not only delivered robust financial performance, but also guided the Street with a bullish long-term outlook. Personally, I believe that Marvell will benefit substantially from the global multi-year strategic shift towards smart automotive, cloud/data centers and 5G – also implying exposure to the metaverse story. In this article I use a residual earnings framework to value MRVL. Based on EPS analyst consensus until 2025, a 9% WACC and terminal value growth rate equal to expected nominal GDP growth, I calculate a fair price for MRVL of $75.97/share. Alternatively, investors might also want to consider a xP/E valuation based on 2024 earnings, calculating $63.10/share. Thus, long-term investors might want to take the current price-depreciation as a buying opportunity and accumulate a long position below < $55/share.
Marvell is a semiconductor company with application-specific expertise in some of the fastest-growing industries. The company’s core strengths include data centers (1), carrier infrastructure (2), automotive/industrials (3) and enterprise networking (4). Notably, while Marvell had approximately 62% exposure to consumer products in the past, this number has been reduced significantly-now being below 20%. Marvell’s strengthened focus on infrastructure, and enterprise digitalization, not only makes the company less vulnerable to cyclical trends, but also better positioned to take advantage of secular growth-tailwinds such as 5G and cloud/data centers. According to the latest investor presentation, Marvell expects the following revenue distribution by 2024: data center (40% of sales), carrier infrastructure (18%) enterprise networking (21% of sales) markets, and automotive/consumer (21% sales). Marvell serves customers worldwide.
Marvell is well positioned to ride secular growth trends such as 5G wireless upgrades, data-center investments and enterprise digital transformation. The industry’s total addressable market is expected to grow 8% CAGR until 2024, while Marvell’s serviceable addressable market will grow 13% CAGR, from $20 billion to $30 billion.

Marvell TAM expectations

Marvell – Investor Presentation 2021

Marvell – Investor Presentation 2021
Notably, the Cloud, 5G and Automotive segments are expected to grow +20% CAGR, with a foreseeable long-term target of 15%-20%. Conservative investors might ask if these growth rates are reasonable, and sustainable. I do think so. In my opinion, Marvell’s revenue expansion is based on a multi-year growth story driven also by the metaverse appeal.

Marvell SAM growth expectation

Marvell – Investor Presentation 2021

Marvell – Investor Presentation 2021
Moreover, margins are expected to remain elevated, with gross margin between 64% and 66%, operating margin between 38% and 40% and FCF margin of >32%. Investors may want to acknowledge that as compared to 2020 estimates, margin expectations have improved across all metrics by approximately 2 percentage points.

Marvell Financial Performance

Marvell – Investor Presentation 2021

Marvell – Investor Presentation 2021
Marvell delivered a very successful financial year. Here are the comments of Matt Murphy, Marvell’s President and CEO:
“Revenue grew in all five of our end markets, with strong contributions from cloud, 5G and auto, which together represented 40% of total revenue. In addition, our enterprise networking end market has become another growth pillar, with revenue increasing 64% year over year, driven by our content gains and share increases, as enterprises continue to transform their infrastructure to address the needs of a more flexible, hybrid workforce.”
Net revenue for fiscal 2022 was $4.462 billion, up more than 50% year-over-year. GAAP net loss, however, was $(421) million, or $(0.53) per diluted share, mostly due to M&A restructuring expenses and share-based compensation. Marvell calculates Non-GAAP net income of $1.279 billion, or $1.57/share. Marvell closed the financial year with $613 million in cash & cash equivalents against a total debt position of $4.726 million.
In addition, during the year Marvell completed the integration of Inphi, an acquisition that is expected to accelerate Marvell’s ambition for the fast-growing cloud data-center market. Analysts expect that the combined entity Marvell-Inphi could generate 2023 EBITDA as high as $1.5 billion. Overall, analysts expect Marvell to achieve approximately EPS of $3 / share by 2023, implying an 8.6% CAGR since 2020. Sales are expected to be $6 billion in 2023, up 100% as compared to 2 years prior.
Marvell looks relatively cheap with an estimated 2024 P/E of 18.5 and P/BV of 2.62. But what does the valuation say? I have constructed a Residual Earnings framework based on the analyst consensus forecast for EPS till 2025-based on more than 20 analysts, a WACC of 9% and a TV growth rate equal to GDP growth. I believe a WACC of 9% is reasonable, given the company’s tech/IP moat, but also considering the rising interest-rate environment. The long-term growth assumption equal to nominal GDP might be an underestimation, in my opinion. If investors might want to consider a different scenario, I have also enclosed a sensitivity analysis based on varying WACC and TV growth combination. (For reference, red cells imply an overvaluation, while green cells imply an undervaluation as compared to MRVL’s current valuation).
Based on the above assumptions, my valuation estimates a fair share price of $75.97/share, implying a 41.3% upside potential based on accounting fundamentals.

Marvell Valuation

Analyst Forecast, Author’s Calculations

Sensitivity Table Marvell Valuation

Analyst Forecast, Author’s Calculations

Analyst Forecast, Author’s Calculations
Analyst Forecast, Author’s Calculations
Alternatively, investors could also apply multiples to value Marvell. I suggest using a 15% discount to Marvell average P/E multiple of the past 5 years (24.5x) and apply the metric to Marvell’s estimated 2024 Earnings of $3.6 / share. Discounting the result based on a 9% WACC implies a fair valuation of $63.10/share.
Investors should note a few risks: First, expected growth might not materialize, as investments in cloud/5G could turn out to be softer than forecasted. A similar argument might be applied to Marvell’s automotive exposure, which depends on EV/autonomous vehicle adoption. Second, competition with peers could intensify, which will impact Marvell’s market share and margins. Third, we might see a global recession sometime in 2023/2024. Of course, slowing consumer and enterprise demand will negatively affect Marvell’s business operations. Fourth, rising real yields will render Marvell’s deferred earnings from expected growth opportunities less valuable to the present. Finally, while Marvell is positioned to outperform the broader market, the relative gain doesn’t necessarily imply an absolute gain.
Marvell’s strength in some of the most exiting tech themes, including cloud/data center, 5G and automotive, exposes the company to substantial business growth potential, with growth targets as high as 30% per year. While the stock price has suffered from negative sentiment towards risk/growth assets, the headwinds to the stock price appear temporary. Long-term investors might appreciate the lower share price and accumulate shares < $55/share. I give a Buy rating to MRVL with a base-target price of $75.97/share.
This article was written by
Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Not financial advice.

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