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Investment thesis
Thanks to the Automotive Ethernet and Electro-Optics segments, Marvell Technology (NASDAQ:MRVL) has good potential for long-term revenue growth. However, we have a neutral opinion. Despite the growth in turnover, the gross margin and the operating margin are in constant decline. Due to active M&A transactions, Marvell’s asset turnover is decreasing and financial leverage is increasing. In our estimation, the company is trading close to a fair price. We value stocks as a Hold.
Company profile
Marvell Technology Inc., founded in 1995 in Delaware, USA. With its subsidiaries, it develops and markets analog, mixed and digital signal processing systems, as well as embedded and standalone integrated circuits. The company offers a portfolio of “Ethernet” solutions, including controllers, network adapters, physical transceivers and switches; single-core or multi-core processors for different customers and markets; MRVL operates in the United States, China, Malaysia, Philippines, Thailand, Singapore, India, Israel, Japan, South Korea, Taiwan, and Vietnam. The revenue structure is shown below:
(Source: Created by the author)
Institutional investors hold 84.1% of the company’s shares. A list of the main shareholders is presented below:
(Source: Created by the author)
The management is headed by:
- Matt Murphy – President and CEO;
- Jean Hu – financial director;
- Raghib Hussain – President, Products and Technologies;
- Chris Koopmans – Chief Operating Officer;
- Dan Christan – Executive Vice President.
Industry overview
According to WSTS, in 2021, semiconductor sales are estimated at $553 billion, or 25.6% more than in 2020 ($440.4 billion). The market is expected to grow by 8.8% in 2022 and reach $601.5 billion.
(Source: Deloitte)
According to Deloitte, semiconductor sales in 2021 will be $542.6 billion. Marvell specializes in the most important segments: data processing electronics and automotive electronics. Automotive semiconductors are one of the most promising segments. According to Bloomberg, it will grow at a CAGR of 11.80% through 2030.
Automotive Ethernet and electro-optics opportunities
The Automotive Ethernet (Networking) and Electro-Optics (Storage) segments represent the greatest potential. The former is the fastest growing and currently earns the company $1.5 billion in revenue (50% of all revenue). MRVL predicts that automotive semiconductors will generate $5.3 billion by 2028.
(Source: Company presentation)
Another important segment for Marvell is electro-optics for data centers (storage). This segment has grown from $260 million in 2017 to $1 billion, thanks to the latest PAM4 DSP processor, which offers high data processing speed. Management expects this segment to continue growing actively with a CAGR of 24% through 2024 and will amount to $2 billion. Given the potential of the market, such expectations seem realistic.
(Source: Company presentation)
Marvel plans to drive growth in electro-optical solutions through the acquisition of Inphi, a leader in this segment. The deal was completed in 2020 for $10 billion.
The development of these segments is an important driver of revenue growth. If they develop according to the management plan, they will provide the bulk of MRVL’s revenue by 2025.
Financial performance
Over the past five years, MRVL’s revenue has grown an average of 5.45% per year. For 2021 [TTM], the turnover is 3.9 billion dollars, which is the maximum value for the company. According to the results for the last 9 months, revenue increased by 43.7% year-on-year.
(Source: Created by the author)
Despite revenue growth, MRVL is not becoming more profitable. Profitability is steadily declining. Gross margin fell from 60% in 2017 to 50% at the end of the last reporting period. The operating margin fell from 20% to -1.37%. The net profit margin is negative (-10.5%). The high profit in 2019 is due to the sale of a subsidiary of NXP Semiconductors.
Due to mergers and acquisitions, goodwill has increased considerably in recent years. As a result, asset turnover fell from 0.5 in 2018 to 0.2. The current market environment may become a growth driver for asset turnover. However, we do not expect this indicator to progress significantly since MRVL recently acquired Inphi.
(Source: Created by the author)
The assets/equity ratio is constantly growing and is now equal to 1.4. Despite the growth in financial leverage, the company still has a strong balance sheet.
(Source: Created by the author)
Despite the high revenue growth rate and a favorable market environment, gross profit and operating profit continued to decline due to “goodwill”. Usually efficient companies become more profitable as they grow. However, MRVL is still burning shareholder value.
Evaluation
In our DCF model, we made several assumptions. We expect revenue growth in line with the Wall Street consensus, followed by a slowdown. Margins and other relative indicators are predicted based on historical momentum and current trends. Our assumptions are presented below:
(Source: Created by the author)
Based on our assumptions, the expected dynamics of the main financial indicators are presented below:
(Source: Created by the author)
With a Stable Growth in the Cost of Equity equal to 10%, the Weighted Average Cost of Capital [WACC] is 9.6%.
(Source: Created by the author)
With Terminal EV/EBITDA of 22.42x, the fair market value is $123,740 million, or $80.44 per share. Thus, the company is trading at a price close to the fair price.
Conclusion
Despite the excellent prospects for the Data Processing Electronics and Automotive Electronics segments and a favorable market environment, MRVL does not create shareholder value. Gross and operating margins are constantly falling. Asset turnover is down due to growth in goodwill. The company is growing. According to our assessment, Marvell Technology is trading near the right price. We are neutral on the company.
