After Earnings, Is Marvell Stock a Buy, a Sell, or Fairly Valued?

Marvell Technology released its fiscal third-quarter earnings report on Dec. 3. Here’s Morningstar’s take on Marvell’s earnings and stock.

Key Morningstar Metrics for Marvell Technology

• Fair Value Estimate: $90.00
• Morningstar Rating: 2 stars
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: High

What We Thought of Marvell Technology’s Q3 Earnings

• We raised our fair value estimate for Marvell to $90 per share from $75 after lifting our estimates for its data center growth over the next five years. The firm’s artificial intelligence momentum is building faster than we previously anticipated, and we expect that momentum to continue in the medium term.
• Marvell is winning in the AI chip space via its custom-designed chips for Amazon AMZN like Trainium2 and its dominant position in optical chips that help connect GPUs in AI clusters.
• The stock still looks roughly 25% overvalued after a significant rise in price following the company’s earnings report. We have optimistic forecasts for Marvell’s growth and believe investors must assume even greater rates of growth to justify buying shares today. We forecast 40% annual data center growth through fiscal 2029, including 75% growth for AI sales annually over the same period.

Fair Value Estimate for Marvell

With its 2-star rating, we believe Marvell’s stock is overvalued compared with our long-term fair value estimate of $90 per share, which implies a fiscal 2025 price/adjusted earnings of 56 times and an enterprise value to sales of 13 times, along with a 1% free cash flow yield. The primary driver of our valuation is growth in data center revenue.

We expect 22% sales growth for Marvell over the next five years, primarily from organic share gains as it flexes its portfolio for growing applications in public clouds and AI. We model a mixed fiscal 2025 with strong data center growth and sharp declines across enterprise and telecom customers. We expect it to take organic share across most of its end markets, but for its largest win rate to come in the data center. We expect its consumer portfolio to wind down gradually as part of the business over the long term.

Read more about Marvell’s fair value estimate.

Economic Moat Rating

We assign Marvell a narrow economic moat. We believe the firm holds intangible assets in networking chip design that let it compete at the cutting edge and defend its competitive position from well-capitalized competition, and that it also benefits from switching costs. We expect Marvell to earn excess returns on invested capital over the next 10 years.

To us, intangible assets in networking chip design come in the form of engineering expertise, both in silicon design and integration with complementary hardware and customer networking topologies. This comes from decades of development, R&D expense, and engraved customer relationships. In our view, Marvell’s billions of dollars of cumulative R&D over the past decade have created a portfolio of differentiated intellectual property from which it can draw to build custom and semi-custom designs for myriad applications and customers.

Read more about Marvell’s economic moat.

Financial Strength

We expect Marvell to focus on deleveraging with its free cash flow. As of January 2024, the firm carried $951 million in cash and $4.2 billion in total debt, largely taken on to acquire Inphi in 2021. We expect Marvell to stay leveraged but to pay down debt as it matures. We forecast the firm’s free cash flow generation to ramp up toward $3 billion a year by fiscal 2029, up from $1 billion in fiscal 2024, as it expands the top line. We think Marvell will fund obligations and organic investment with cash flow and have enough left over for share repurchases on top of its steady dividend. Marvell also has a $750 million revolver available if it encounters a liquidity crunch.

Read more about Marvell’s financial strength.

Risk and Uncertainty

We assign Marvell a High Uncertainty Rating. We view the firm as prone to cyclicality in its end markets, arising from cloud capital expenditures, 5G buildouts, and the cyclical storage drive market. Though we believe Marvell’s moat and opportunity for content growth help it smooth over some cyclicality, it can be vulnerable to downturns in end-customer spending.

We foresee Marvell facing continued competition in its end markets, from well-capitalized competitors. Our valuation assumes an ability for Marvell to defend its current share in data centers and 5G networks, and win greater wallet share at customers with its processors and optical chips. We also forecast increased investment to help Marvell win back shares in its enterprise end market against Broadcom AVGO. If Marvell struggles on any of these fronts, its performance could suffer. We also think new entrants pose a risk for Marvell, like Cisco Systems CSCO entering the networking chip arena with its Silicon One family.

Read more about Marvell’s risk and uncertainty.

MRVL Bulls Say

• Marvell’s strong position in optical chips and its burgeoning custom chip business offer a strong foothold into generative AI infrastructure, which should fuel high growth.
• Marvell’s strong non-GAAP profitability reflects moaty pricing power, in our view.
• We believe Marvell’s wide portfolio of switches, processors, and optical chips gives it ample opportunity for cross-selling and share gains.

MRVL Bears Say

• Marvell remains a distant second to Broadcom in networking chip market share, and it will face an uphill battle to overcome its rival’s customer relationships.
• Marvell’s end markets are cyclical and can be prone to downturns.
• Marvell still has a solid portion of sales going into storage drives, which we think are less differentiated.

This article was compiled by Sokhoeun Noeut.