INVESTMENT THESIS
Marvell Technology Group Ltd. (NGS: MRVL) fell by 4% in a mixed market on 12/4/20 after the company met Street non-GAAP EPS expectations but missed on revenue. Revenue for fiscal 3Q21 was constrained by industry-wide supply chain challenges that prevented Marvell from fully meeting customer demand. Although sales lagged consensus, the top line grew 13% year-over-year. Management preannounced results late in October.
At its virtual investor event, held in October 2020, Marvell demonstrated its accelerating momentum in the 5G, Cloud, and Automotive end-markets with its networking, connectivity, and storage products. The company sees the serviceable available market (SAM) for its products growing at a 9% compound annual rate, from $16 billion in calendar 2020 to $20 billion in calendar 2023. Key areas within the SAM include edge (automotive, industrial, consumer); data center (on-premises, telco SPs, cloud SPs); carrier (wired and wireless 4G/5G); and enterprise (access, aggregation, gateways, etc.).
Within the broad $100 billion data infrastructure total addressable market (TAM), Marvell is building presence and leadership in storage and networking, computing and security, and, most recently, custom ASICs. The company has exited or divested noncore businesses, including WiFi, LTE modem, and multimedia. The company also announced the planned $10 billion acquisition of Inphi, a leader in optical interconnects used in data centers, and plans to re-incorporate as a U.S. company.
Marvell guided strongly for the January-end quarter (fiscal 4Q21). The company has a robust development and new business win pipeline and is now generating 5G infrastructure revenue; its 5G market opportunity should broaden going forward. Cloud data center demand also continues to accelerate. Marvell is moving to customized solutions in the server processor space in response to the use-specific needs of hyperscale customers.
We believe that Marvell is generating increasing momentum in key markets.
RECENT DEVELOPMENTS
The shares declined 37% in 2015, compared to a 6% gain for peers, and edged up 5% in 2014.
Management preannounced results late in October, at the time of the Inphi deal announcement.
Discussing the recently concluded quarter, CEO Matt Murphy noted that stronger-than-expected revenue in networking products offset weaker-than-expected revenue in storage.
On the positive side, the supply-chain challenges are more related to demand than to breakdowns in vendors’ ability to produce parts. In terms of Marvell’s end markets, the challenges are being most acutely felt in the networking market.
For fiscal 3Q21, networking revenue of $445 million (59% of total) grew 35% annually and 13% sequentially. Strength was broad-based across a range of end markets including 5G, cloud, automotive, and enterprise. 5G growth continues to be led by ASIC sales related to Chinese deployments. The rollout of 5G outside of China is beginning to pick up, and Marvell expects 5G momentum to increase in multiple markets following the release of 5G handsets from leading OEMs.
Sequential growth in 5G was also driven by shipment of standard and semicustom products to Samsung. A second major customer has chosen Octeon Fusion NAND processors to power its 5G base stations. Marvell is also building a presence in Open RAN and virtualized RAN (ORAN and VRAN). ORAN eases multivendor interoperability challenges, while VRAN enables more software-directed architectures.
Marvell’s ASIC business is generating strong momentum in cloud applications, including its 112 Gig SerDes solution in 5 nm process node. These products are aimed at top-of-rack and spine switches for hyperscale data centers. Automotive is recovering from COVID-19 impacts, and Marvell is ramping multiple Ethernet design wins in model year 2021 vehicles.
In enterprise, Marvell has introduced its second-generation Octal multi-gig PHY family; these products extend the boundaries of traditional campus environments. For 4Q21, Marvell expects growth from 5G to continue offset declines in Cloud ASIC revenue. As such, networking revenue was guided sequentially flat for fiscal 4Q21.
In the storage business, revenue of $276 million (37% of total) declined 4% annually and 5% sequentially; internal expectations were for a sequentially flat quarter. During fiscal 3Q21, demand for fiber channel products failed to fully materialize as anticipated. The business did see sequential demand growth in storage controllers, led by the customer ramp of SSD controllers. Marvell also benefited from growth in Cloud demand for HDD solutions. The storage business should rebound in fiscal 4Q21, with sequential revenue growth in the low teens.
At its virtual investor day on 10/8/20, Marvell discussed its broader strategy, including market focus, go-to-market tactics, engineering developments & goals, and business development planning. Marvell also detailed its heightened focus on the market subsegments of 5G, cloud, and automotive.
The CEO discussed Marvell’s focus and strategy within the broad $100 billion data infrastructure TAM. The company has exited or divested noncore businesses including WiFi, LTE modem, and multimedia, while building presence and leadership in storage and networking, computing and security, and, most recently, custom ASICs.
The company has identified a serviceable addressable market (SAM) for its products. Key areas within the SAM include edge, which includes automotive, industrial, and consumer products such as PCs, cameras, and gaming. Drawing work from industry analysis firms such as Dell’Oro and Gartner, Marvell expects this market to grow at a 9% compound annual rate through 2023, to become a $2.8 billion opportunity.
Data center includes customer premises equipment (CPE), as well as data centers operated by telco SPs (service providers), cloud SPs, and internet SPs. This market has the potential to become Marvell’s largest SAM, at $7 billion by 2023; it is also growing fastest among SAM end markets, with an 11% CAGR.
The carrier SAM is being driven by 5G mobility, along with legacy 4G/3G mobility and wired infrastructure. It is growing at an 8% compound annual rate, with the potential to reach $6.9 billion by 2023. The enterprise SAM includes network elements such as access devices, aggregation, gateways, firewalls, VPNs, and SD-WAN. This SAM is expected to grow at a 4% annual rate to $3.1 billion by 2023. Altogether, Marvell expects its total SAM to grow at a 9% compound annual rate, from $16 billion in calendar 2020 to $20 billion in calendar 2023.
Marvell has further identified high-growth subsegments in these four SAM categories where it is focusing its innovation and go-to-market initiatives. Within the carrier SAM, Marvell’s focus area is 5G. In the data center, it is focused on cloud, primarily for its networking products and secondarily for storage. Within Edge, Marvell is mainly focused on automotive, which, though not the biggest market sensitive to consumer spending, is among the fastest-growing.
Whereas the four SAMs overall are expected to grow at a 9% compound annual rate from 2020 through 2023, Marvell’s three focus areas are forecast to grow at a 16% rate over that time frame and reach $10.6 billion. In 5G, Marvell’s products serve the small cell and full RAN base-station market, along with adjacent areas including massive MIMO, Ethernet, and radio. The cloud strategy assumes a roughly 50/50 split between Marvell’s networking & storage products. Storage drivers includes customizable products for SSDs, growth in nearline servers, and preamp. Networking drivers including DPUs (data processing units) for security and network acceleration, and custom and semi-custom ASICs.
Automotive is the smallest but potentially the fastest-growing opportunity, as the major trends of connected vehicle, electric drive train, and fully autonomous all require additional semiconductor content. Within this larger opportunity, Marvell is currently focused on automotive Ethernet for connectivity. Management estimates that Marvell connectivity content in a fully autonomous vehicle could double to $100 from $50 today.
(NSM: IPHI), a leader in high-speed data movement, including optical interconnects. Marvell will pay $10 billion for Inphi in a cash-and-stock transaction. In conjunction with the transaction, Marvell (currently domiciled in Bermuda) intends to reorganize so that the combined company will be domiciled in the
RECENT DEVELOPMENTS
United States. The deal, according to Marvell, will create a U.S. semiconductor ‘powerhouse’ with an enterprise value of approximately $40 billion.
Inphi’s data interconnect platform is designed for high-speed, low-power applications including AI data center and the global networks of the future. Specifically, Inphi’s electro-optics portfolio ‘provides the connectivity fabric’ for cloud data center and wired and wireless carrier networks. Marvell believes that combining its storage, networking, processor, and security portfolio with Inphi’s opto-electronic interconnects portfolio will position the combined company for end-to-end technology leadership in data infrastructure.
Marvell will pay $66 in cash and 2.323 MRVL shares for each share of IPHY stock, which recently traded at about $150 per share. Upon completion, existing MRVL holders will own 83% of the combined company, and IPHY holders will own 17%. Marvell intends to finance the cash portion with cash-on-hand and additional financing. The deal is scheduled to close by the second half of calendar 2021.
During the investor presentation in October, CFO Jean Hu shared long-term financial targets for Marvell. These include 10%-15% annual revenue growth; a non-GAAP gross margin of 63%-65%; and a non-GAAP operating margin exceeding 35%. Free cash flow is targeted at 30% or more of revenue. The company is pledged to disciplined capital allocation that balances organic investment, strategic M&A, and shareholder returns.
We believe that Marvell is generating increasing momentum in key markets. Our analysis suggests that MRVL stock is undervalued based on the company’s strong cash-flow growth prospects.
EARNINGS & GROWTH ANALYSIS
Revenue matched the $750 million midpoint of management’s guidance of $713-$788 million, while slightly lagging the $751 million consensus estimate. Total sales in 3Q21 did not include WiFi revenue, as that business was sold to NXP toward the end of fiscal 2020.
Non-GAAP earnings for fiscal 3Q21 were $0.25 per diluted share, up 48% year-over-year and $0.04 sequentially from 2Q21. Non-GAAP EPS matched the $0.25 midpoint of management’s $0.22-$0.28.
For fiscal 4Q21, the company expects its networking business to be sequentially flat, while the storage business is set for a double-digit sequential rebound. Marvell projects revenue of $785 million +/- 5%, or $748-$824 million.
FINANCIAL STRENGTH & DIVIDEND
Prior to acquiring Cavium, Marvell carried no debt. Marvell acquired Cavium in a deal valued at about $6 billion.
Since then, the company has repurchased stock opportunistically or mainly as an offset to share-based compensation and other share grants.
The board has not raised the dividend since that time. The annual dividend of $0.24 yields about 0.6%. We estimate coverage of the dividend of about 5.5-times based on cash flow from operations and about 5.0-times based on free cash flow.
MANAGEMENT & RISKS
CEO and President Matt Murphy has served in those roles since 2016. Jean Hu, formerly CFO and two-time interim CEO of QLogic, is the CFO. Dan Christman is EVP Storage Group; Chris Koopmans is EVP Networking & Connectivity Group.
Marvell has replaced its longtime global head of sales Tom Lagatta; while that is usually sign of a disappointing sales trend, this change may reflect normal turnover. SVP Lagatta earlier announced his intention to retire. Marvell is promoting current VP of North American sales Dean Jarnac to head of global sales.
The acquisition of Inphi will be the largest deal yet for Marvell. Risks include overpaying, failure to achieve planned synergies, and poor fit from a corporate culture perspective. Marvell’s clear success in integrating Cavium and growing acquired Cavium assets increases our confidence that the company will succeed with the Inphi acquisition.
In 2016, the husband-and-wife team who founded Marvell in 1995 were forced to resign following an accounting scandal. The taint of Marvell’s accounting scandal has receded. Should another such issue emerge, however, twice-bitten investors would likely react fiercely. We have no reason to believe that the current management team and board, chastened by that misadventure, would create a culture in which such malfeasance would resurface.
The acquisitions of Cavium, Aquantica, Avera, and future niche assets have the potential to create financial strains and introduce risks related to cultural integration, attaining targeted efficiencies, and retaining acquired customer relationships. So far, those risks have not been borne out. Marvell and Cavium have proven to be logical partners for combination given their complementary rather than overlapping products, markets and customers, and that this lessens risks that the combination will fail to meet its objectives.
We expect an equally smooth integration of Aquantia and Avana.
Marvell faces the risks of any small company attempting to operate in multiple product niches and end markets. Recent success in improving operating margins suggests that Marvell is not over-reaching.
Finally, Marvell has customer concentration risk in the HDD controllers business. Cultivation of new markets and the Cavium acquisition should help reduce this risk.
COMPANY DESCRIPTION
Primary products include HDD and SSD controllers; components used in memory drives; Ethernet switches and PHYs; ARM processors in SoC format; WiFi/ Bluetooth combo chips; and embedded processors and SoCs. Marvell is growing organically and by acquisition, including the acquisitions of Cavium, Aquantia, and Avana, and the planned acquisition of Inphi.
VALUATION
Compared with its peer group, MRVL trades at discounts on relative P/E, and at premiums on price/sales, P/E and EV/EBITDA.
On December 7, BUY-rated MRVL closed at $44.14, up $0.76.
Source: Argus
