2023-08-30 12:03:06 ET
Summary
- We’re upgrading Marvell Technology, Inc. to hold.
- We believe Marvell Technology, Inc.'s disappointing July quarter earnings and October quarter outlook were consistent with our negative thesis that A.I.-related growth won’t drive financial outperformance in 2H23.
- While the demand from the data center market has begun to recover, we still see continued demand weakness in enterprise and carrier markets.
- We think Marvell will suffer a net port loss as the adoption rate of A.I. servers increases, but we think the company can offset these losses with higher ASP.
- We now think Marvell could be an in-line performer, but we recommend investors remain on the sidelines and look for possible attractive entry points.
We're upgrading Marvell Technology, Inc. (MRVL) to a hold; we now believe the underperformance has been priced into the stock. MRVL's disappointing July quarter earnings and outlook for October were consistent with our negative thesis of A.I.-related growth being unable to drive financial outperformance in the near-term. MRVL reported revenue in line with consensus at $1.34B and guided for $1.4B +/- 5%. We continue to expect demand weakness to pressure MRVL's enterprise and carrier sales, but we now see a more favorable risk-reward profile for the stock.
We downgraded MRVL stock to a sell in early June based on our belief that while MRVL may double A.I.-related sales Y/Y, we don't believe this will meaningfully boost top-line growth. While MRVL stock ran up in 1H23, being the second name with the most A.I. traction in the semi-space last quarter after Nvidia (NVDA), the stock has underperformed since our downgrade. MRVL is up 56% YTD, outperforming the S&P 500 (SP500) by 38% but down 14% over the past month, underperforming the S&P 500 by 12%. Post-2Q24 and guidance for the October quarter, we think the weakness has been priced into the stock. We now expect the stock to be an in-line performer in 2H23 and recommend investors stay on the sidelines and look for attractive entry points down the line.
The following graph outlines our rating history on MRVL.
A.I. growth versus legacy weakness
MRVL's July quarter results put a dent in Wall Street's debate that the company's "accelerating" A.I. opportunity would offset weakness in other core businesses; the company slipped after reporting revenue down 12% Y/Y and up 1.5% QoQ and guided for 4% QoQ revenue growth next quarter. The results highlight that demand weakness in enterprise and carrier segments continues in 2H23 while data center demand rebounds up 6% QoQ to $459.8M. We still don't expect A.I. growth in data center business to drive financial outperformance as enterprise and carrier represent 24% and 21% of total sales by end-market. Both segments suffered QoQ drops, and guidance for enterprise is a continued decline, and carrier is forecasted to grow low single-digits driven by 5G wireless.
The following chart outlines MRVL's quarterly revenue trend by end-market.
MRVL's consumer and automotive/industrial sales rebounded QoQ, growing 23% and 18% this quarter to $110.2M and 167.7M. We remain cautious about recovery in these segments as management guides for flat automotive/industrial sequential growth next quarter and lower 12% QoQ growth for the consumer business. Hence, we don't think demand weakness is washed out yet, but we believe our negative thesis has been priced in.
Regarding MRVL's position in the A.I. boom, management now expects "revenue from AI to exit this year at over a $200 million quarterly revenue run rate, or $800 million annualized." This is higher than what had been outlined last quarter, but we still don't think it'll have a material impact on MRVL's financial results in 2H23. Additionally, we continue to believe MRVL will see a net loss of connectivity ports due to the A.I. boom and limited data center capex. Specifically, we think increased industry adoption of A.I. servers will cannibalize traditional compute server volumes in 2H23 due to the limited capex. While we still think MRVL will suffer a net port loss as the industry adoption rate of A.I. servers increases, we think the company can offset these losses with higher ASP and higher bandwidth products for A.I. applications.
Valuation
MRVL is not cheap, trading well above the peer group average due to investor (over)confidence in the company's A.I. growth exposure. On a P/E basis, the stock is trading at 37.0x C2023 EPS $1.58 compared to the peer group average of 29.0x. The stock is trading at 10.2x EV/C2023 Sales versus the peer group average of 5.9x.
The following chart outlines MRVL's valuation against the peer group.
TSP
Word on Wall Street
Wall Street remains bullish on the stock. Of the 31 analysts covering the stock, 28 are buy-rated, and the remaining are hold-rated. The stock is priced at $59 per share. The median sell-side price target is $70, while the mean is $71, with a potential 19-20% upside.
The following chart outlines MRVL's sell-side ratings and price targets.
TSP
What to do with the stock
We're upgrading Marvell Technology, Inc. to a hold. We continue to expect the company to experience demand weakness from enterprise and carrier sales but think the data center business has begun to recover. We operate in a forward-looking market; now we think our negative thesis of A.I.-related growth not driving financial outperformance has played out, and expect Marvell Technology, Inc. to be an in-line performer in 2H23. We recommend investors hold and explore favorable entry points on pullbacks.
For further details see:
Marvell Technology: Upgrading To Hold, Underperformance Priced In