Wed. Sep 28th, 2022

Marvell Technology Group operating headquarters in Silicon Valley

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Elevator Pitch

I have a Buy investment rating assigned to Marvell Technology’s (NASDAQ:MRVL) stock. In my prior update for MRVL written on December 6, 2021, I performed a review of the company’s financial results for the third quarter of fiscal 2022 (YE January).

The focus of this latest article is the preview of Marvell Technology’s upcoming Q2 FY 2023 earnings release. Based on an assessment of key metrics that I watch closely like revenue mix, gross margin and shareholder capital return, I expect MRVL to generate above-expectations earnings for Q2 FY 2023. Marvell’s forward P/E multiple has roughly halved since the beginning of the year, and I think that the extent of valuation de-rating for MRVL is too severe. As such, I raise my investment rating on Marvell Technology from a Hold to a Buy on expectations of a re-rating for its shares following an EPS beat for the second quarter.

The Date Of MRVL’s Upcoming Earnings Report

In a press release dated July 28, 2022, Marvell Technology revealed that it will disclose its Q2 FY 2023 financial results on Thursday, August 25, 2022.

Analysts Have Bullish Expectations Of Marvell’s Q2 Results

In my opinion, Wall Street has a bullish view of how MRVL has performed in the second quarter of fiscal 2023, and this is supported by a number of key observations.

Firstly, the market’s consensus financial projections suggests that Marvell Technology is expected to deliver revenue of $1,517 million and a non-GAAP adjusted earnings per share or EPS of $0.56 for Q2 FY 2023 as per data sourced from S&P Capital IQ.

This implies that MRVL’s top line expansion on a YoY basis in the second quarter of the current fiscal year would have been +41.0%, which is not that far below the company’s YoY revenue growth of +47.9% in Q2 FY 2022. More importantly, Wall Street analysts see Marvell Technology achieving a YoY bottom line increase of +66.2%, which is even faster than its Q2 FY 2022 normalized EPS growth of +61.9%. Moreover, Marvell Technology’s Q2 FY 2023 consensus EPS of $0.56 translates into a decent QoQ increase of +7.7%.

Secondly, the majority of sell-side analysts covering MRVL’s shares have chosen to revise their respective financial estimates for the stock upwards in the last couple of months.

Specifically, 21 out of 32 Wall Street analysts raised their top line forecasts for Marvell Technology in the past three months, and only a single analyst made the decision to lower his or her revenue projection for MRVL over the same period. Similarly, 19 sell-side analysts decided on having higher EPS estimates for MRVL in the last three months, which stands in contrast with a mere three analysts revising their bottom line estimates downward.

Thirdly, the proportion of sell-side analysts bullish on Marvell Technology’s shares remained unchanged in recent times.

It is natural for analysts to downgrade their investment ratings for a specific stock if they are of the view that an earnings miss is on the cards, but this didn’t happen with Marvell Technology. Based on S&P Capital IQ data, there were no changes to the number of Wall Street analysts with Strong Buy (20) and Buy (7) ratings for the stock since end-June 2022.

In summary, the consensus view is that Marvell Technology’s Q2 FY 2023 financial performance should be reasonably good.

My Prediction Is An Earnings Beat For MRVL

I think that Marvell Technology can deliver Q2 FY 2023 earnings that are better than what the market expects based on three key factors.

Firstly, MRVL’s revenue mix is favorable, which is why the company should be able to maintain robust top line growth in the very near term.

The consumer end market only represented 12% of Marvell Technology’s revenue in the first quarter of fiscal 2023. A relatively low exposure to the consumer end market is positive for MRVL, as this end market should be the worst affected in a weak economic environment. At the company’s Q1 FY 2023 earnings briefing on May 26, 2022, Marvell Technology stressed that “from our perspective, ex-consumer demand continues to be very strong.” MRVL also added at the recent quarterly investor call that “datacenter in particular is going to have a great first half (1H FY 2023).” Notably, the datacenter end market is Marvell’s biggest revenue contributor, which accounted for 44% of its top line in Q1 FY 2023.

Secondly, Marvell Technology has proven that it has the ability to offset inflationary cost pressures, and this indicates that the company’s profit margins could exceed market expectations.

MRVL has increased its gross profit margin on a QoQ basis for every quarter between Q4 FY 2021 and Q1 FY 2023, according to financial data taken from S&P Capital IQ. This is likely to have been driven by a number of factors, including price increases, operating leverage, and sales mix. The company has guided for a Q2 FY 2023 gross margin of 65.25% (mid-point of guidance), while the sell-side’s consensus gross margin estimate for the second quarter is 65.29%. I expect Marvell to continue its streak of gross margin expansion (MRVL’s Q1 FY 2023 gross margin was 65.5%), which will beat management guidance and market expectations.

Thirdly, a higher-than-expected level of share repurchases might have helped to offset the dilutive effects of stock-based compensation and provided support for Marvell Technology’s bottom line expansion in Q2 FY 2023.

MRVL spent $15 million on share buybacks in Q1 FY 2023, and it disclosed at its first-quarter results briefing that it “repurchased an additional $50 million of our shares through our 10b-5 program” in the “first three weeks of the second quarter.” This suggests that Marvell Technology is accelerating its pace of share repurchases in the second quarter of this fiscal year.

Mismatch Between Share Price Performance And Earnings Growth

There is a mismatch between Marvell’s bottom line expansion and how its stock has performed.

Marvell Technology’s shares are down by -40.6% for 2022 year-to-date, as compared with a much more modest -11.8% decline for the S&P 500 over this period. In contrast, MRVL has achieved very strong YoY normalized EPS growth in excess of +70% for the past three quarters (Q3 FY 2022, Q4 FY 2022, and Q1 FY 2023) based on S&P Capital IQ’s historical financial data.

MRVL’s consensus forward next twelve months’ normalized P/E has de-rated substantially from 42.9 times as of January 3, 2022 to 21.6 times as of August 19, 2022 as per S&P Capital IQ, even though the company has maintained robust earnings expansion in recent quarters. I think that an earnings beat for Q2 FY 2023 will be the re-rating catalyst needed for a positive re-rating of MRVL’s valuations.

Concluding Thoughts

I rate Marvell Technology as a Buy. The forward P/E valuation multiple compression for MRVL appears to be overdone, and I see Marvell’s shares rising post-Q2 results announcement on an earnings beat.

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