Morningstar

Marvell: Blockbuster Lumentum Deal Looks Tempting, but Risks a Steep Overpay

Lumentum’s optical lasers and components would add huge breadth to Marvell’s optical chip portfolio and further align the firm to rapidly rising artificial intelligence spending.

Signage with logo at the Silicon Valley headquarters of Marvell.
Smith Collection/Gado via Getty
Securities in This Article
Marvell Technology Inc
(MRVL)

Key Morningstar Metrics for Marvell Technology

  • Fair Value Estimate
    : $360
  • Morningstar Rating
    : ★★★★
  • Morningstar Economic Moat Rating
    : Narrow
  • Morningstar Uncertainty Rating
    : High

Bloomberg reported on Oct. 28, citing unnamed sources, that Marvell Technology MRVL is in talks to buy Lumentum Holdings. No price or other deal details were provided, nor any certainty a deal would even come to pass.

Why it matters: Qualitatively, a deal makes sense. Lumentum’s optical lasers and components would add huge breadth to Marvell’s optical chip portfolio and further align the firm to rapidly rising artificial intelligence spending. Growth and operating leverage would be attractive in the deal, depending on the price paid.

  • Marvell makes chips that sit next to Lumentum’s lasers in optical transceivers, making this a natural adjacency. Horizontal integration between the two could offer meaningful synergies. We see Marvell as the undisputed leader in optical DSP chips, as with Lumentum and its EMLs.

The bottom line: We maintain our $360 fair value estimate for narrow-moat Marvell, and $750 valuation for narrow-moat Lumentum. This deal is only market talk for now. We put the probability that a deal goes through somewhere below 50%, and worry about the price Marvell shareholders would pay.

  • Quantitatively, we fear this deal looks rich. Lumentum is up 148% year to date before this story broke, at a 22% premium to our valuation. At $83 billion in market cap, it would be one of the largest tech mergers ever, and risks dilution for Marvell even before a purchase premium.

Bulls say: Lumentum is growing rapidly (we forecast a 46% five-year compound annual growth rate) and has meaningful room for operating leverage. Together, the two would benefit from cross-selling, cost-cutting, and tandem technology roadmaps. A combined entity would be a true optical behemoth in AI infrastructure.

Bears say: Lumentum’s extraordinary results have been at least partially driven by pricing and tight supply, while low-priced competition lurks in China. If current results turn out to be even partially cyclical, Marvell could be overpaying for a weaker asset than it bargained for.

Editor’s Note: This analysis was originally published as a stock note by Morningstar Equity Research.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

Sponsor Center