Marvell: An AI Show-Me Story, Shares Near Fair Value, Downgrading To Hold (NASDAQ:MRVL)

2024 is already turning into the year of the chip stocks. Names like NVIDIA (NVDA), AMD (AMD), Broadcom (AVGO), and even Qualcomm (QCOM) have performed well as AI enthusiasm shows few signs of letting up. More bullish industry earnings news came last week, lifting so many stocks in the industry. Has the fervor gotten too frothy? Maybe so for one semiconductor company.

I am downgrading Marvell Technology (NASDAQ:MRVL) from a buy to a hold. The valuation now appears fair, while technical momentum is very strong. The firm issued a soft Q4 outlook during the previous earnings season, and its legacy units are seen as concerns.

YTD Performance Heat Map: Marvell Among the Chip-Stock Winners

According to Bank of America Global Research, Marvell is a leading fabless supplier of high-performance standard and semi-custom products with a core strength in developing complex System-on-Chip architectures and integrating analog, mixed-signal, and digital signal processing functionality. Marvell’s broad portfolio of IP spans computing, optics, networking, storage, and security and addresses the enterprise, cloud, telecom, auto, and industrial markets.

The Delaware-based $61.5 billion market cap Semiconductors industry company within the Information Technology sector trades at a high 47.1 forward non-GAAP price-to-earnings ratio and pays a small 0.3% forward 12-month dividend yield as of January 19, 2024. Ahead of earnings in February, the stock carries a low 2.2% short interest, though that has ticked higher from October, and an implied volatility percentage of 38%, about unchanged from my previous analysis.

Back in October, MRVL reported a decent quarter. Q3 GAAP EPS verified at $0.41 which easily topped the Wall Street consensus estimate by $0.49 while revenue of $1.4 billion was down about 7% from the same period a year earlier, roughly in line with the consensus forecast. Casting a cloud on the quarterly numbers was a soft set of guidance issued by the management team.

Weakness in its enterprise networking and carrier infrastructure markets, representing about 60% of sales, was pointed to as the reason for the stock’s negative reaction, despite some AI tailwinds being in play. The firm sees Q4 revenue, to be reported at the end of next month, to come in at $1.42 billion with 35% sequential growth in its data center business, driven by demand for chips and AI. Some analysts pointed to the possibility that businesses away from data center were weak, and Seeking Alpha notes that there have been a whopping 24 negative EPS revisions for FY1 in the last three months (and zero EPS upgrades).

Key risks for Marvell include a somewhat high net debt position, as well as achieving synergies with recent M&A moves. And while AI and chip demand is strong right now, the market tends to be cyclical and can be commoditized over time, potentially compressing the company’s margins as competition grows. Still, analysts at Citi and UBS came out more positive on MRVL just last week.

On valuation, analysts at BofA see earnings having fallen nearly 30% on a non-GAAP basis in MRVL’s FY 2024 which has just ended. Looking ahead, FY 2025 operating per-share profits are projected to increase by 24% and then easily surpass $2 by 2026. While BofA has brought down their profit expectations for Marvell, the current consensus forecast calls for $2.02 of EPS in the current year and $2.82 in the out year.

Dividends, meanwhile, are forecast to hold at just $0.24 annually over the coming quarters while free cash remains modest, though positive. With earnings multiples around 35 using NTM numbers, the stock has turned more expensive lately.

Marvell: Earnings, Valuation, Free Cash Flow Forecasts

Following a slew of EPS downgrades as a result of large cuts to the firm’s legacy businesses, I assert that a lower $2.10 normalized annual operating EPS figure is warranted, below $2.50 as I had used in October 2023. If we assume $2.10 of earnings and apply a 35 multiple, appropriate given 25% to 30% short-run EPS growth, then shares should be near $74, making the stock nearly fully valued in the market. Thus, I see it as a hold on valuation.

Valuation Metrics Turn Less Attractive

Compared to its peers, Marvell features a lofty valuation, particularly following the latest set of sellside profitability downgrades. The C+ growth rating is a bit of a misnomer in my view as it considers the company’s steep EPS decline in the year that just ended – earnings growth is actually quite healthy over the coming two years per consensus estimates. Finally, share-price momentum has been extraordinarily strong lately, and I will detail a technical breakout later in the article.

Competitor Analysis

Looking ahead, corporate event data provided by Wall Street Horizon show an unconfirmed Q4, 2024 earnings date of Thursday, February 29 AMC. No other volatility catalysts are seen on the calendar.

Corporate Event Risk Calendar

The Technical Take

MRVL endured a steep selloff from last summer through a low notched under $50 in early November 2023. Notice in the chart below that shares fell under the stocks’ rising 200-day moving average, but then quickly recovered in a bullish false breakdown pattern. A rapid advance initially paused at $58, pulling back to $50, but then the semiconductor stock surged into year-end with continued growth in early 2024. Following strong earnings numbers out of Taiwan Semiconductor (TSM) and Super Micro Computer (SMCI) last week, nearly all the chip stocks were in rally mode.

Take a look at what MRVL did, though. The stock broke out above its $68 peak from June last year. Above that resistance, an upside measured move price target to about $90 is now in play, based on the height of the consolidation pattern seen over much of the back half of the last year. ($68 – $46 = $22). $22 added on top of $68 yields $90. Making that optimistic technical objective doable is that there is a very low amount of volume by price up to its all-time near $94 – there are hypothetically few sellers to pressure the uptrend. Moreover, the latest price thrust comes alongside confirmation in the RSI momentum oscillator at the top of the graph.

Overall, the chart is constructive, with support near $63 and a second area near $55.

MRVL: Shares Breakout Through the 2023 High, $90 In Play

The Bottom Line

While I like the technical setup and momentum situation with MRVL, the valuation appears fair to me at current levels. In this case, I am weighing the valuation more heavily than the chart, leading me to downgrade Marvell from a buy to a hold.