sankai
Investment Thesis
Marvell Technology (NASDAQ:MRVL) is set to report its fiscal Q1 2025 results on Thursday, 30 May 2024, after hours.
Marvell, one of the top chip companies near the epicenter of the whole AI movement, is priced high. Very high. Even though its overall revenues are still expected to be negative in fiscal H1 2025 (not to be confused with calendar year).
According to my estimates, investors are being asked to pay 60x forward free cash flow for a business, with a restrictive balance sheet.
Even though I recognize the appeal of its story, I’m not overly enthused with its risk-reward. Hence, I’m sitting on the fence on this one.
Rapid Recap
A year ago, I wrote a bullish analysis on Marvell where I concluded with:
[…] the combination of “yet another AI beneficiary” semiconductor company that has a compelling story, as well as pointing to meaningful improvement in the second half of its fiscal year, plus an improving profitability profile in the second half of this year, is something that investors are extremely keen to reconsider and bid higher.
Since then, my thesis has fully played out and become priced in.
Author’s work on MRVL
And while I was right on the overall idea, and the stock did deliver 20% in twelve months, the fact of the matter is that, MRVL didn’t outperform the S&P 500.
Today, rather than underwriting this thesis again, I’m moving my rating to the sidelines as I wonder whether this risk-reward is sufficiently appealing.
Why Marvell Technology? Why Now?
Marvell Technology is a company that makes computer chips. They specialize in designing chips that help store data and make gadgets work faster and connect better.
Marvell’s near-term prospects, particularly in its custom silicon and data center segments, are solid, fueled by the swelling demand for AI-driven infrastructure.
Its custom silicon business is poised for strong growth, with a robust pipeline of opportunities. The anticipated ramp-up in shipments for custom silicon programs underscores Marvell’s position as a key player in addressing the evolving needs of the AI and accelerated computing markets.
Moreover, the forecasted exit rate of $200 million for the current fiscal year suggests a significant revenue surge, with the potential to drive substantial growth in fiscal 2026. This is for the most part the core of the bull thesis.
Further, in tandem with its custom silicon initiatives, Marvell’s data center segment presents a compelling growth opportunity, propelled by the increasing adoption of cloud infrastructure and AI applications.
Marvell’s comprehensive suite of solutions across data center interconnect, switching, and compute positions it a one-stop shop for data center customers.
However, Marvell faces challenges in other segments, including the carrier, enterprise, and consumer markets, which have experienced significant revenue declines due to cyclical downturns and soft industry demand.
While these segments are expected to recover, the near-term outlook remains uncertain.
Additionally, the automotive and industrial end market, while showing resilience in certain areas such as automotive Ethernet connectivity, faces sequential weakness driven by weak market dynamics. On this point, Infinera (INFN), which is not a direct competitor but provides technology that powers communication networks, reported results yesterday that to a certain extent echo this general sentiment.
Given this mixed and uncertain backdrop, let’s now delve into its financials.
Marvell Technology Growth Rates is Poor
MRVL revenue growth rates
Even though Marvell has a solid story of how its growth in the data center end market continues to surpass expectations, this alone doesn’t sufficiently take away from the fact that its revenue growth rates for fiscal Q1 2025 are still expected to come in negative y/y.
And what truly confounds matters is that this will be the fifth consecutive quarter of unappetizing revenue growth rates.
And for now, it appears to be the case that fiscal Q2 2025 isn’t likely to see positive revenue growth rates either.
So, investors are being asked to buckle in for several more months of negative revenue growth rates.
Given this context, what sort of multiple are investors willing to pay to MRVL?
MRVL Stock Valuation – 60x Forward Free Cash Flow
To complicate matters further, Marvell carries a balance sheet with approximately $3 billion of net debt. This is by no means a thesis breaker, but it does mean that Marvell’s ability to take on a meaningful needle-moving acquisition in the near term is hampered.
What’s more, according to my estimates, Marvell’s fiscal 2025 is likely to make approximately $1.2 billion of free cash flow. Of that figure, approximately $200 million goes to pay the taxes on management’s stock options.
This means that Marvell’s actual “clean” free cash flows point to about $1 billion in the coming year. Therefore, this leaves the stock priced at 60x forward free cash flow.
And yes, the contention could be made, as no doubt it will be, that Marvell is navigating the trough of its business cycle and when its cycle improves, its free cash flows will also substantially improve too.
But I question whether that line of reasoning is based more on hope than facts. After all, on the back of contracting revenues for the past year, Marvell’s free cash flow has remained strong. This means that management has already cut back on a significant amount of non-core expenses, which will need to be funded once the cycle improves.
So, again, we go full circle, I’m not overly bullish that there’s all that much juice left in this stock.
The Bottom Line
In conclusion, Marvell Technology presents a mixed picture, with solid growth prospects in its custom silicon and data center segments, driven by the increasing demand for AI-driven infrastructure.
However, challenges persist in other segments, making its near-term outlook uncertain as it heads into its fiscal Q1 2025 results in two weeks’ time.
Financially, Marvell’s high valuation, coupled with negative revenue growth rates and a heavy debt burden, makes me question the appeal of this stock.
With the stock priced at 60x forward free cash flow and little clarity on when the cycle might improve, I’m not recommending Marvell Technology at this time.