An Investment Hotbed
Attainable to all investors, the Marvell Technology (NASDAQ:MRVL) stock has toppled the charts in 2023, surging a staggering 55% year-to-date. Tapping into a valuation analysis, it’s evident that the stock remains incredibly undervalued despite the substantial rally. An overlooked discount is the likely culprit, influenced by temporary headwinds in Fiscal Year 2024. Nevertheless, my scrutiny signals an easing of challenges, with the company reverting to its exceptional revenue growth trajectory. Although there might be a couple of quarters overshadowed by inventory burdens, this is merely a fleeting setback. Surveying the bigger picture, Marvell is strategically positioned to leverage numerous technological super trends, targeting a diverse and promising spectrum of end markets. In light of this, my verdict is a resounding “Buy” rating for MRVL.
Marvell Technology operates as a fabless semiconductor supplier, specializing in high-performance standard and semi-custom products. Its forte lies in crafting and scaling complex System-on-a-Chip architectures, harmonizing analog, mixed-signal, and digital signal processing functionality.
The company operates its fiscal year until the nearest Saturday to January 31, with Data center making up 41% of its total sales in FY 2023.
A superficial glance at MRVL’s financial performance over the last decade may be misleading, with a seemingly lackluster 6.3% revenue CAGR for a semiconductor company. However, delving deeper, the last three fiscal years witnessed an almost doubling of MRVL’s revenue, showcasing robust operating leverage.
MRVL’s solid financial position is underscored by its substantial reinvestment in research and development, with the R&D to revenue ratio at 30% and above over the past decade. This steadfast commitment to innovation has allowed the company to amass a robust balance sheet, low financial leverage, and ample liquidity. Despite offering dividends, MRVL’s meager 0.5% yield and below 15% payout ratio may seem inconsequential, but the focus on reinvesting in business development and achieving growth and profitability expansion is a sound capital allocation strategy.
The most recent quarterly earnings exceeded consensus estimates, despite a year-over-year revenue dip of around 12%. This was primarily due to soft Data center sales plunging by 29%, partially offset by a striking 32% growth in the automotive/industrial end market. Other end markets demonstrated stable year-over-year performance. Although revenue downturn impacted profitability, MRVL’s sustained significant R&D investments amid the revenue dip must not be overlooked. Management attributed revenue softness to navigating oversupply challenges and cautious enterprise purchasing managers, branding it a transient rather than a recurring issue.
Anticipating a 9% year-over-year decline in the upcoming quarter’s revenue, MRVL’s formidable growth path is evident. The anticipated sequential Data Center revenue growth of 15%, illustrating a steady return to growth, is indicative of less taxing macro challenges.
Beyond the financial realm, Marvell’s focus on cutting-edge R&D investments insinuates its strategic positioning across promising end markets like data centers and automotive. Given the projected compound growth in cloud computing and AI in the coming years, MRVL is primed to ride the wave of these lucrative secular trends.
MRVL’s year-to-date surge of 55% has outpaced the broader U.S. stock market. Despite Quantitative metrics assigning an “F” valuation grade due to higher multiples, current valuation ratios align with historical averages, making MRVL seem fairly priced.
Simulating a discounted cash flow [DCF] model, a 9% WACC is used for discounting, well within the valueinvesting.io range. Consensus revenue estimates project a fair 14% CAGR over the next decade. My DCF calculations peg the business’s fair value at $55.5 billion, 15% higher than the current market cap. Eyeing an attractive upside potential, my target price for MRVL stands at $65.
The significant concentration of accounts receivable and revenue from a limited number of customers poses a tangible risk to MRVL’s financial stability. Additionally, the substantial portion of net revenue generated from shipments to China invites geopolitical risks, given the prevailing tensions between the U.S. and China.
Despite the upcoming Q3 earnings release offering potential stock movements, it’s advisable for investors to adopt a measured approach rather than heavily committing to MRVL upfront.
In summation, MRVL is a compelling “Buy”. At current levels, the stock is attractively priced, with temporary headwinds overshadowing its true potential. Set against a promising secular backdrop, MRVL is primed for robust revenue growth and expanded profitability over the long haul. With a strategic reach encompassing diverse end markets, Marvell Technology stands poised to flourish in the ever-evolving technological landscape.