2023-08-23 09:00:00 ET
Summary
- Marvell Technology stock has underperformed the S&P 500 since my downgrade in May after its monstrous surge. Buyers are still holding the line but for how much longer?
- Analysts have upgraded their price targets on MRVL in line with the bottoming in its revenue and earnings for the current fiscal year. However, hasn't MRVL already surged?
- Marvell's market-leading networking and custom business is expected to drive growth further. True, but its valuation is also not cheap.
- MRVL's price action still shows signs of significant caution, and dip buyers could be distributing. I will only add more if I see a much steeper decline.
- I'm waiting for a steep selloff to knock out recent buyers after its upcoming Q2 earnings on August 24 before re-entering.
Marvell Technology ( MRVL ) is slated to report its fiscal second-quarter or FQ2 earnings release on August 24. The stock of the leading networking and custom chips semiconductor design company has continued to consolidate since my previous downgrade , given its previous momentum spike in May 2023.
As such, MRVL has markedly underperformed the S&P 500 ( SPX ) ( SPY ) since my caution, even though buyers have not given up the $55 level. My analysis suggests that MRVL's valuation has normalized toward its fair value zone, although it remains much more expensive than Broadcom ( AVGO ) stock.
In addition, Seeking Alpha Quant assigned MRVL with an "F" valuation grade, despite boasting an industry-leading "A" profitability grade. As such, I believe investors are likely assessing whether MRVL's growth premium is justified, as analysts marked up their price targets or PTs on MRVL.
The low end of MRVL's PTs has risen to $60, with an average of $70 based on PTs from 30 analysts (according to S&P Cap IQ data). With MRVL's support level anchored at the $55 level, it seems buyers are confident in MRVL's forward execution to leverage its market leadership across the semi-value chain.
CEO Matt Murphy articulated in a June conference that the company's opportunities are well-diversified. Moreover, it has managed the downstream inventory digestion well while leveraging the benefits from the generative AI cycle. Furthermore, it doesn't compete directly with Nvidia ( NVDA ) in the AI training chips market, as it continues to build on its custom business with enterprises and cloud hyperscalers. Notwithstanding the recent momentum, Marvell also enunciated that the custom business remains relatively small but is expected to scale up over time and expects its revenue contribution to be more meaningful.
JPMorgan ( JPM ) analysts also highlighted the significant opportunities from Marvell's custom business, justifying its premium valuation. Despite that, the company relies on its core business segments to generate its high-margin corporate profitability. In the near term, these segments are still expected to drive margin accretion, with the custom business featuring as growth optionality moving ahead. Hence, the medium-term growth story could feature Marvell's custom business as a critical growth leverage, justifying its growth premium. Management suggested that it could set up an Investor Day to highlight the key growth drivers that could underpin its trajectory moving ahead.
Analysts' estimates on Marvell for its fiscal second quarter suggest the bottoming of its revenue decline before a growth inflection through 2024. In addition, its adjusted EBITDA decline is also expected to bottom out, justifying MRVL's positive buying sentiments since May 2023.
As such, analysts are projecting for Marvell's adjusted EBITDA to recover by nearly 36% in FY25 (calendar year ending January 2025), critical to underpinning its recent valuation spike.
MRVL last traded at a forward EBITDA of 26.9x, or a forward free cash flow or FCF yield of 2.6%. Both metrics suggest MRVL trades at a discernible growth premium relative to its internal average or peers. As such, I believe assessing whether recent buying sentiments are robust enough to help lift MRVL's upward momentum is essential. Let's see.
MRVL price chart (weekly) (TradingView)
MRVL's price action has stalled since its monstrous surge in May 2023. The $70 zone has remained a critical resistance zone, although selling pressure has remained under control.
Despite that, the current zone could still be a distribution zone, as investors assess whether Marvell's forward guidance is sufficient to justify a decisive break above its $70 resistance level.
I'm not in a hurry to add more MRVL exposure at the current levels, having added at levels well below the current zone. However, if a steeper pullback occurs in helping to improve MRVL's risk/reward profile significantly, that may get me back into the game on MRVL.
Rating: Maintain Hold. Please note that a Hold rating is equivalent to a Neutral or Market Perform rating.
Important note: Investors are reminded to do their due diligence and not rely on the information provided as financial advice. Please always apply independent thinking and note that the rating is not intended to time a specific entry/exit at the point of writing unless otherwise specified.
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For further details see:
Marvell Q2: Warning Signs Still There - Don't Just Ignore