Marvell: Great Long-Term Secular Drivers, But Sentiment Is A Threat

This has been a challenging year for Marvell (NASDAQ:MRVL). As fears have grown about a big reset for growth semiconductor stocks in 2023, Marvell shares have lagged the SOX index this year, falling more than 50% year-to-date and underperforming about 10%, and trading down more than 15% since my last update.

I find Marvell shares a little more challenging to evaluate now. I love the company’s long-term leverage to growth opportunities in the data center, particularly as hyperscalers move to 400G and 800G in the coming years, and I also like the exposure to 5G and enterprise networking. What I don’t like as much is the valuation and the level of expectations heading into this next quarter, as sell-side estimates for FY’24 revenue range from $6.3B to $7.8B and this is still a consensus “buy” call.

I do think Marvell is a high-quality growth name, and I think paying up for growth is fine, but I also see more risk than upside to sell-side estimates coming out of the next quarter, and I’d rather risk missing out than buying in ahead of that potential reset.

 

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Marvell: Great Long-Term Secular Drivers, But Sentiment Is A Threat

Marvell's Growth Transformation Well-Reflected In The Valuation

 

I like a lot of what Marvell (MRVL) management has been doing, including the acquisition of Inphi (IPHI) and the company’s push into custom silicon for data center/hyperscale customers. Supply constraints and uncertain timing on 5G base station deployments are headwinds, but at least relatively well-understood ones at this point.

What I haven’t liked so much has been the valuation, as the semiconductor sector has been hot on strong demand growth across multiple end-markets. Marvell provided a blink-and-you-missed-it dip around earnings, but has since filled that gap. Still, while the shares are up a strong 30% since my last update, that’s actually lagging performance relative to the SOX, as well as Broadcom (AVGO), one of Marvell’s largest competitors.

I know growth investors are fully in the driver’s seat now, and I do like the growth opportunities across Marvell’s business, including base station silicon, data center silicon, and auto Ethernet. I just don’t like the extent to which all of the good news is already in the share price. Moreover, I’d note that buying into peaking lead times for chip stocks doesn’t usually end well – it doesn’t preview a crash, but it does suggest there will be another chance to buy in at better valuations.

 

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Marvell's Growth Transformation Well-Reflected In The Valuation

Marvell Adds A Premier Silicon Photonics Asset To Its Data Center Arsenal

Having already built an impressive data center portfolio, in part through acquisitions, that included processors, storage, security, and Ethernet components, Marvell (MRVL) decided to go one large step further, announcing the acquisition of Inphi (IPHI) and its high-speed optical interconnect assets in a deal worth close to $8.7 billion. Marvell is paying around $8.7B to expand its served addressable market by about $3 billion a year, but adding Inphi should also create meaningful cost, development, and revenue synergies over time. Moreover, it takes a premier asset off the board, preventing another rival from acquiring it, and I wouldn’t dismiss the possibility of end-market growth exceeding current expectations.

I can’t fault Marvell’s ambition, but it wasn’t the company’s ambition or execution that concerned me coming out of the analyst day. Obviously, 5G infrastructure and data center offer very attractive multiyear growth opportunities, but there’s an increasingly high bar in terms of growth and margin performance to drive further re-rating.

 

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Marvell Adds A Premier Silicon Photonics Asset To Its Data Center Arsenal

Marvell Management Uses Its Analyst Day To Talk Up The Growth Story

It’s not really fair to say that Marvell (MRVL) is “doubling down” on its growth opportunities in the data center and 5G, but management definitely structured their analyst day on October 8 to highlight Marvell’s transformation into a growth story. While this will come at a modest cost to margin (historically an underappreciated driver of semiconductor stock multiples), this is a growth-driven market today and the messages coming out of the analyst day shouldn’t do any harm to the already-robust multiples for these shares.

Strategically I like what Marvell is doing. I like the opportunities to leverage Cavium IP for data center DPUs and likewise the opportunities to leverage its Cavium and Avera IP into custom ASICs. Auto Ethernet opportunities are shaping up, and 5G should provide strong growth for several years. The issue is the price and the multiples. I was already expecting double-digit revenue growth over the next five years (and close to 9% growth over the next 10 years), and the presentation didn’t support a strong outlook for margins. At over 31x ’22 EPS and 26x ’23 EPS, it’s tough to say that the growth potential is going unappreciated.

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Marvell Management Uses Its Analyst Day To Talk Up The Growth Story

Marvell Has The Growth Story, But Valuation Seems Advanced

In downturns semiconductor investors often seek out and reward margins, while growth is more desirable when the cycle turns. I’m speaking in broad generalities of course, but I think that may be a useful way to look at Marvell (MRVL), as the shares of this networking and storage chip company seem pricey on the basis of margins and cash flows, but do seem poised to deliver well above average revenue growth over the next three to five years. Although I’d don’t really like Marvell at this price on a “core holding” basis, I can understand the appeal for growth/momentum investors who are less sensitive to valuation concerns.

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Marvell Has The Growth Story, But Valuation Seems Advanced

Marvell Executing On A Once-Underappreciated Transformation Strategy

I liked Marvell (MRVL) back in September of 2018, as I thought the Street was too focused on the near-term challenges of integrating Cavium and not enough credit to the transformation underway in the business. While the shares dropped another 20% from that point in time with the SOX, the shares have since rebounded more strongly, and the shares now sit about 20% higher than they were at the time of the last article (while the SOX is down about 4%).

I continue to like the direction Marvell is going. Significant wins in 5G (primarily with Samsung) could translate into more than $700 million of incremental revenue, and the company has been building up its ASIC capabilities such that I believe the company has a chance of emerging as a viable second-source rival to Broadcom (AVGO) in time and shifting more of the business’s center of gravity towards growth markets and away from storage.

What I don’t like so much is the current valuation. Marvell has attractive end-market exposure for the next 12-18 months and looks better-positioned for the near-term growth that Wall Street loves so much, but I think the valuation is a tougher sell now.

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Marvell Executing On A Once-Underappreciated Transformation Strategy

Broadcom Beats, But Rebuilding Confidence Takes Time

Short of repudiating the CA (CA) acquisition and announcing a huge buyback, there’s really not much Broadcom (AVGO) could have done with its fiscal third quarter results that would restore enthusiasm for the shares back to its pre-deal announcement levels. And frankly, I’m not sure that would have done it either, as the shares had been trending down since late November anyway.

There are still a lot of positives to the Broadcom story, including a very strong market position in switch silicon, underrated (still) capabilities in heavy-duty AI ASICs, and cash-generating businesses in areas like networking ASICs and enterprise storage. Add in a possibly improving Wireless business and an undemanding valuation, and I believe Broadcom shares still have a lot of appeal. Set against that appeal are the concerns about Broadcom going too far out of its area of expertise with the CA deal and a wider slowdown in the chip space.

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Broadcom Beats, But Rebuilding Confidence Takes Time

Broadcom Not Exactly Back To Square One

The market hasn’t been too accommodating to Broadcom (NASDAQ:AVGO) of late. Once a darling (and still well-regarded by many analysts and investors), the shares have been underperforming on a host of issues including worries about the company’s M&A policies (and its reliance on M&A), competitor actions, and the overall health of the semiconductor space.

I really have no operational concerns about Broadcom, and I think the company’s well-balanced mix will generate above-average growth in both the short term and long term. The prospect for value-adding M&A is more uncertain, though returning cash to shareholders is not a bad back-up plan. Based on mid-to-high single-digit long-term growth potential and margins in the 40%’s, I believe Broadcom shares are meaningfully undervalued now, but it will likely take some time for the dust to settle and for investors to move past worries about limitations on future M&A.

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Broadcom Not Exactly Back To Square One

Mellanox Pushed Toward Higher Margins, But Ample Uncertainties Remain

Although I've generally been bullish on Mellanox (MLNX) over the last five years, this semiconductor company (and stock) has had its issues, including an apparent unwillingness (or inability) to communicate clearly with investors regarding strategy decisions and priorities. On top of that, the company's R&D-heavy business plan has kept a lid on margin expansion - one of the prime value drivers for semiconductor stocks, and particularly, now as the world seems to think that Broadcom's (AVGO) margin-driven strategy is better than the revenue growth-driven strategies of yesteryear in semiconductors.

While management seems to regard the involvement of Starboard (a noted activist investor) as an unwelcome distraction, the reality is that Starboard is not wrong in taking management to task for the underwhelming stock performance - over the past five years, you would have done far better with Broadcom, Cavium (CAVM), Marvell (MRVL), or even Intel (INTC) than Mellanox. With management paying more attention to margins, the shares actually look a little undervalued now and potentially more significantly so as an M&A play.

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Mellanox Pushed Toward Higher Margins, But Ample Uncertainties Remain

Mellanox Knocked Around, But Definitely Not Knocked Out

It’s not uncommon for elevated volatility and controversy to surround growth stocks, but Mellanox (MLNX) seems to get more than its share. It certainly doesn’t help that the company competes with heavy-hitters like Intel (INTC) and Broadcom (AVGO), nor has it helped that the company’s InfiniBand revenue (once the prime attraction of the story) has fallen off significantly. Add in elevated spending concerns, and it has been a bumpy ride for shareholders.

That bumpy ride has also been relatively productive for shareholders recently. Between a well-known activist shareholder taking a stake and management ratcheting down operating expenses, the shares have shot up this year and finally started outperforming the sector again.

I liked Mellanox back in May of this year, but as things sit today, I think most of the remaining value lies in the extent to which Mellanox attracts solid M&A attention and/or provides credible visibility to renewed InfiniBand growth. The stock price already assumes mid-teens growth in adjusted free cash flow, but a buyout bid would likely start in the high-$60's, if not the $70's.

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Mellanox Knocked Around, But Definitely Not Knocked Out

Seeking Alpha: How Do You Solve A Problem Like Qualcomm?

Referencing a 56-year old song for the title of an article about a tech company is admittedly bizarre, but then so too is Qualcomm's (NASDAQ:QCOM) situation. The acknowledged leader in handset baseband and app processors, the stock is down about 25% over the past year, as weaker handset sales momentum and weaker margins have really started to bite hard.

Qualcomm is in the enviable situation of having a pretty darn good business in hand, as well as ample cash (and cash flow) to fund complementary or expansionary M&A. The question is whether the company has the courage (and/or vision) to risk the short-term wrath of investors in order to improve the long-term outlook. Although the company's valuation does stand out in an otherwise expensive crowd, I'm not so proud that I won't admit that I really don't know what to do about the shares.

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How Do You Solve A Problem Like Qualcomm?

Seeking Alpha: Cavium Networks Has The Right Exposures, But It's Priced Like It

Cavium (NASDAQ:CAVM) doesn't lack for ambition, as it is taking aim at Intel (NASDAQ:INTC), Broadcom (NASDAQ:BRCM), and Freescale (NYSE:FSL) (which is being acquired by NXP Semiconductors (NASDAQ:NXPI)) across a wide range of markets. On the plus side, the company's chips offer strong performance characteristics and look well-placed to exploit growing markets like base stations, cloud, and SDN. On the negative side, the stock's 40%-plus performance since my last article has mopped up the undervaluation I saw in the shares and the trade-off between expectations and valuation is less compelling.

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Cavium Networks Has The Right Exposures, But It's Priced Like It

Seeking Alpha: Unable To Find A Foothold, Marvell Keeps Sliding

One of the things I notice in the bullish arguments for Marvell (NASDAQ:MRVL) is that there's a lot of talk about the company's "strong IP" and the likelihood that an appeals court will overturn a $1 billion-plus patent judgment against the company. The trouble with that is that Marvell hasn't given anybody particularly strong reasons lately to believe that they can translate IP into sustainable market share and the patent judgment reversal (if that indeed happens) is a one-time event.

As is, it's hard to find a strong argument to buy and hold Marvell for its turnaround qualities. The storage business seems to be incapable of supporting sustained growth, and I think the company's Quixotic quest to remain a player in mobile is bleeding away value. Last and not least, I see no particular signs that networking chip companies like Broadcom (NASDAQ:BRCM) and Cavium (NASDAQ:CAVM) are, or should be, worried about Marvell's efforts in this market.

I do believe that ditching the mobile business could add $1.50/share in value relatively quickly and a substantial reduction in the patent award could add another $2/share. Those two events would be worth around a 20% return, but neither are certain. What's more, absent a better vision from management regarding what Marvell does (and does not) actually do well, it's hard to regard this as more than a trading candidate.

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Unable To Find A Foothold, Marvell Keeps Sliding

Seeking Alpha: More Of The Same From Microsemi ... And That's Just Fine

As chip companies go, Microsemi (NASDAQ:MSCC) generally flies under the radar while executing on a fairly predictable list of corporate priorities. Between last week's analyst day and the not-so-surprising announcement of another acquisition, management has showed yet again that it's sticking with a script that has served the company relatively well.

I believe that the arrow is still pointing up for this company and this stock. Management spoke of improving backlogs in defense, communications, and satellites and reiterated its goal of 60% gross margin and 30% operating margin by the end of fiscal 2016. Adding in the contributions of Vitesse (NASDAQ:VTSS), the shares are still modestly undervalued and if management is able to drive better synergy from this deal (particularly in terms of product development/growth), addition upside is still in play.

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More Of The Same From Microsemi ... And That's Just Fine

Seeking Alpha: Avago Definitely Getting Some Benefit Of The Doubt

A little more than a year ago, I wrote about Avago Technologies (AVGO) and liked the prospects for the stock based both on its strong position in FBAR filters (an important component for handsets) and its under-appreciated positions in areas like fiber optic transceivers, SerDes ASICs, industrial fiber optics, and motion encoders for markets like networking, automation, and so on. In the 14 months since that piece, the shares have risen more than 110%.

I'm not quite as bullish on Avago now, though. I have a positive opinion of the LSI acquisition on balance, but I feel like sentiment has improved at a much greater rate than the long-term business prospects. While I do think Avago can exceed its own targets for reaping benefits from the LSI deal, it would appear that management pretty much has to if the stock is going to remain strong. I do like the newly-diversified Avago's business mix a little more and I think the company can do big things in both wireless and networking, but I think it takes some pretty ambitious assumptions to drive a significantly higher value estimate.

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Avago Definitely Getting Some Benefit Of The Doubt

Seeking Alpha: Marvell Shares May Not Be Done Yet

The last few months have been kind to many chip stocks, with Maxim (MXIM), Marvell (MRVL), and Nvidia (NVDA) all logging double-digit returns. Marvell's run actually goes quite a bit further back, as the shares have more than doubled from their late 2012 lows. As Marvell has grown share in the hard drive controller space and announced LTE wins in China, investors have returned to the shares despite worries about a looming patent infringement award and the prospects of competing with Qualcomm (QCOM).

The sell-side seems to be getting more cautious about suppliers to the high-end smartphone market, but that's not really Marvell's core market. Although I own and prefer Broadcom (BRCM), Marvell may be undervalued enough to be worth a closer look even after this long run. Most chip stocks are bought to be sold, though, so investors shouldn't assume that this is a buy-and-forget opportunity.

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Marvell Shares May Not Be Done Yet

The Motley Fool: Modest Expectations Still Working in Broadcom Corporation's Favor

Owning a stock market darling is a blast, but sometimes you have to turn to the ugly ducklings to find value. Such is the case with Broadcom (NASDAQ: BRCM  ) , where the market seems certain that the company can't win much baseband, can't keep its connectivity business, and doesn't deserve to be owned on the basis of its strength in networking or broadband. It is up to Broadcom management to prove that the market is too skeptical, but investors who own Broadcom today should be in position to benefit from stronger results later this year.

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Modest Expectations Still Working in Broadcom Corporation's Favor

Investopedia: Marvell - Unicorn Of The Chip Space?

Reading sell-side research on Marvell (Nasdaq:MRVL), you might come away not thinking too highly of the company or its decisions to grow the business in areas like Chinese mobile and wireless. On the other hand, look at the company's actual market share gains, financial performance, and the market's opinion on the company and you come away with a much different opinion. So far, the bulls in that argument are winning the day, as Marvell has been outperforming names like Qualcomm (Nasdaq:QCOM), Broadcom (Nasdaq:BRCM), and Nvidia (Nasdaq:NVDA).

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Investopedia: Nvidia's Core May Be Strong, But Tegra Is Getting Expensive

Nvidia (Nasdaq:NVDA) generates a healthy amount of free cash flow and has maintained a strong GPU business despite but the pressures in the PC market, but analysts and investors have increasingly soured on the company's mobile ambitions. Tegra has yet to catch on, and with competition ramping up from Intel (Nasdaq:INTC), Qualcomm (Nasdaq:QCOM), Marvell (Nasdaq:MVRL), and others, this whole adventure may end up as little more than an expensive mistake. The shares don't look expensive even on undemanding assumptions, but Tegra-related concerns are likely to keep a lot of investors out of the shares.

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Seeking Alpha: LSI Still Undervalued, As It Shows Hints Of What Lies Ahead

It was six months ago to the day that I wrote about the potential for LSI (LSI), highlighting both the upside if the company executed on opportunities in flash, networking, and storage/servers but also the risk that the path to prosperity would have some bends and potholes. That's proven more or less true so far, as the absolute return over the past half-year (barely positive) is well below that of rival Marvell (MRVL) and the overall Nasdaq composite, but second quarter earnings show some encouraging results.

Provided that the PC market doesn't get even worse (and/or that Marvell doesn't grab even more share), I believe there's still a case to make for LSI as a $9 to $10 stock. While the real ramp in revenue growth and margins isn't likely until 2014, improving sentiment towards chip stocks (at least those outside the wireless space) could pull the stock along in the meantime.

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LSI Still Undervalued, As It Shows Hints Of What Lies Ahead