Networking chips designer Marvell Technology (NASDAQ: MRVL) missed analyst expectations in Q3 FY2023 quarter, with revenue up 26.9% year on year to $1.53 billion. Marvell Technology made a GAAP profit of $13.3 million, improving on its loss of $62.5 million, in the same quarter last year.
Marvell Technology (MRVL) Q3 FY2023 Highlights:
- Revenue: $1.53 billion vs analyst estimates of $1.55 billion (1.28% miss)
- EPS (non-GAAP): $0.57 vs analyst expectations of $0.59 (3.02% miss)
- Revenue guidance for Q4 2023 is $1.4 billion at the midpoint, below analyst estimates of $1.6 billion
- Free cash flow of $368.3 million, up 42.2% from previous quarter
- Inventory Days Outstanding: 115, up from 114 previous quarter
- Gross Margin (GAAP): 50.5%, up from 48.5% same quarter last year
Moving away from a low margin storage device management chips in one of the biggest semiconductor business model pivots of the past decade, Marvell Technology (NASDAQ: MRVL) is a fabless designer of special purpose data processing and networking chips used by data centers, communications carriers, enterprises, and autos.
Marvell was founded in 1995 by Dr. Sehat Sutardja, his wife, and his brother, and for the first two decades was focused on chips used to run storage devices like disk drives and networking equipment like ethernet switches. It also supplied Wi-Fi chipsets used in mobile devices like the iPhone and Google’s Chromecast. In 2016, in the wake of an internal accounting investigation activist investor Starboard Value acquired a minority stake and ousted Dr. Sutardja and his wife, installing Matt Murphy as CEO.
Murphy quickly exited low margin businesses like the consumer hard drives and Wi-Fi chips and refocused R&D efforts to focus on the higher margin networking business. He made multiple transformative acquisitions: Cavium in 2018, Avera and Aquantia in 2019, and Inphi and Innovium in 2021. The result is a company with leading chipsets that enable data transfer – within and between datacenters, across 5G cellular networks, and throughout autos.
The chips used to power today’s cloud data centers are no longer just general purpose CPUs like we think of that run a PC, but there is also a range of chips that are customized for specific tasks like AI used to scan online videos or machine learning used to make ecommerce recommendations. Marvell specializes in these types of chipsets, known as customized ASICs. Marvell also increasingly competes with chip heavyweights Intel and Nvidia with its Octeon data processing units or “DPUs” which is an ARM-based CPU that offloads networking, storage, security, and other infrastructure workloads from the CPU in the server and accelerates them, saving CPU capacity for other tasks, like running applications.Marvell’s peers and competitors include AMD (NASDAQ:AMD), Broadcom (NASDAQ:AVGO), Intel (NASDAQ:INTC), and Nvidia (NASDAQ: NDVA).
Longer manufacturing duration allows analog chip makers to generate greater efficiencies, leading to structurally higher gross margins than their fabless digital peers. The downside of vertical integration is that cyclicality can be more pronounced for analog chipmakers, as capacity utilization upsides work in reverse during down periods.
Marvell Technology's revenue growth over the last three years has been very strong, averaging 31.3% annually. And as you can see below, last year has been especially strong, with quarterly revenue growing from $1.21 billion to $1.53 billion. Semiconductors are a cyclical industry and long-term investors should be prepared for periods of high growth, followed by periods of revenue contractions (which can sometimes offer opportune times to buy).
Despite missing analyst estimates this quarter, 26.9% revenue growth for Marvell Technology's was still OK.This marks 11 straight quarters of revenue growth, which means the current upcycle has had a good run, as a typical upcycle tends to be 8-10 quarters.
However, Marvell Technology believes the growth is set to continue, and is guiding for revenue to grow 4.24% YoY next quarter, and Wall St analysts are estimating growth 16.1% over the next twelve months.
Product Demand & Outstanding Inventory
Days Inventory Outstanding (DIO) are an important metric for chipmakers, as it reflects the capital intensity of the business and the cyclical nature of semiconductor supply and demand. In a tight supply environment, inventories tend to be stable, allowing chipmakers to exert pricing power. Steadily increasing DIO can be a warning sign that demand is weak, and if inventories continue to rise the company may have to downsize production.
This quarter, Marvell Technology’s inventory days came in at 115, 28 days above the five year average, suggesting that that inventory has grown to higher levels than what we used to see in the past.
Marvell Technology's gross profit margin, how much the company gets to keep after paying the costs of manufacturing its products, came in at 50.5% in Q3, up 2 percentage points year on year.
Over the past year, Marvell Technology has seen its already reasonably high gross margins continue to rise, averaging 51.5%, indicative of a solid competitive offering, efficient cost controls, and relatively low pricing pressure.
Marvell Technology reported an operating margin of 21.2% in Q3, up 6.8 percentage points year on year. Operating margins are one of the best measures of profitability, telling us how much the company gets to keep after paying the costs of manufacturing the product, selling and marketing it and most importantly, keeping products relevant through research and development spending.
Operating margins have been trending down over the last year, averaging 15.7%. However, Marvell Technology's margins are inline with the semiconductor industry's norm, as it continues to appropriately manage its operating expenses.
Earnings, Cash & Competitive Moat
Analysts covering the company are expecting earnings per share to grow 21.2% over the next twelve months, although estimates are likely to change post earnings.
Earnings are important, but we believe cash is king as you cannot pay bills with accounting profits. Marvell Technology's free cash flow came in at $368.3 million in Q3, up 96% year on year.
Marvell Technology has generated $1.09 billion in free cash flow over the last twelve months, translating to 18.6% of revenues. This is a strong result; Marvell Technology's free cash flow conversion was higher than most semiconductor companies, in the last year. If it maintains this level of cash generation, it will be able to invest plenty in new products, and ride out any cyclical downturn more easily.
Over the last 5 years Marvell Technology has reported an average return on invested capital (ROIC) of just 1.88%. This suggests it may struggle to find compelling reinvestment opportunities within the business.
Key Takeaways from Marvell Technology's Q3 Results
With a market capitalization of $39.6 billion, more than $723.4 million in cash and with free cash flow over the last twelve months being positive, the company is in a very strong position to invest in growth.
We were very impressed by the strong improvements in Marvell Technology’s operating margin this quarter. And we were also glad to see the improvement in gross margin. On the other hand, it was unfortunate to see that the revenue guidance for the next quarter missed analysts' expectations. Overall, it seems to us that this was a complicated quarter for Marvell Technology. The company is down 7.09% on the results and currently trades at $42.16 per share.
Is Now The Time?
When considering Marvell Technology, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. Although Marvell Technology is not a bad business, it probably wouldn't be one of our picks. Its revenue growth has been strong, though we don't expect it to maintain historical growth rates. But while its strong free cash generation allows it to sustainably invest in growth initiatives, unfortunately its its relatively low return on invested capital suggests suboptimal growth prospects.
Marvell Technology's price to earnings ratio based on the next twelve months is 17.3x. We don't really see a big opportunity in the stock at the moment, but in the end beauty is in the eye of the beholder. And if you like the company, it seems that Marvell Technology doesn't trade at a completely unreasonable price point.
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