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No Surprises In Marvell Technology's (NASDAQ:MRVL) Q2 Sales Numbers But Stock Drops


Full Report / August 25, 2022
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Networking chips designer Marvell Technology (NASDAQ: MRVL) reported results in-line with analysts' expectations in Q2 FY2023 quarter, with revenue up 40.9% year on year to $1.51 billion. Guidance for the next quarter missed analyst expectations with revenues guided to $1.56 billion at the midpoint, or 1.2% below analyst estimates. Marvell Technology made a GAAP profit of $4.3 million, improving on its loss of $276.4 million, in the same quarter last year.

Marvell Technology (MRVL) Q2 FY2023 Highlights:

  • Revenue: $1.51 billion vs analyst estimates of $1.51 billion (in-line)
  • EPS (non-GAAP): $0.57 vs analyst estimates of $0.56 (small beat)
  • Revenue guidance for Q3 2023 is $1.56 billion at the midpoint, below analyst estimates of $1.57 billion
  • Free cash flow of $258.9 million, up 63.9% from previous quarter
  • Inventory Days Outstanding: 114, up from 109 previous quarter
  • Gross Margin (GAAP): 51.8%, up from 34.5% 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).

Analog Semiconductors

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. Read More The semiconductor industry is broadly divided into analog and digital semiconductors. Digital chips are what most people think of as the brains of almost every electronic device. Their primary purpose is to either store (memory chips) or process (CPUs/GPUs) data. By comparison, analog chips regulate real world signals, such as temperature, speed, sound, or electrical current, converting them into a stream of digital data that can be processed by digital semiconductors. Analog semiconductors are also used to manage power in any electronic device; they convert, store and distribute the electrical energy that comes from a battery or wall plug. Analog chips are found everywhere from household appliances like refrigerators or washing machines, to smartphones, cars and factory production lines.

Sales Growth

Marvell Technology's revenue growth over the last three years has been strong, averaging 27.2% annually. And as you can see below, last year has been especially strong, with quarterly revenue growing from $1.07 billion to $1.51 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).

Marvell Technology Total Revenue

Despite reporting topline results in-line with analyst estimates this quarter, 40.9% revenue growth for Marvell Technology's was still good. This marks 10 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 28.7% YoY next quarter, and Wall St analysts are estimating growth 21.4% 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.

Marvell Technology Inventory Days Outstanding

This quarter, Marvell Technology’s inventory days came in at 114, 29 days above the five year average, suggesting that that inventory has grown to higher levels than what we used to see in the past.

Pricing Power

Marvell Technology's gross profit margin, how much the company gets to keep after paying the costs of manufacturing its products, came in at 51.8% in Q2, up 17.3 percentage points year on year.

Marvell Technology Gross Margin (GAAP)

Over the past year, Marvell Technology has seen its already reasonably high gross margins continue to rise, averaging 50.8%, indicative of a solid competitive offering, efficient cost controls, and relatively low pricing pressure.

Profitability

Marvell Technology reported an operating margin of 17.1% in Q2, down 40.3 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.

Marvell Technology Adjusted Operating Margin

Operating margins have been trending up over the last year, averaging 16.8%. Marvell Technology's margins are around the midpoint for the semiconductor industry, as its cost structure is appropriately managed.

Earnings, Cash & Competitive Moat

Analysts covering the company are expecting earnings per share to grow 29.6% 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 $258.9 million in Q2, up 36.3% year on year.

Marvell Technology Free Cash Flow

Marvell Technology has generated $912.1 million in free cash flow over the last twelve months. This is a solid result, which translates to 16.5% of revenue. That's above average for semiconductor companies, and should put Marvell Technology in a relatively strong position to invest in future growth.

Over the last 5 years Marvell Technology has reported an average return on invested capital (ROIC) of just 2.31%. This suggests it may struggle to find compelling reinvestment opportunities within the business.

Key Takeaways from Marvell Technology's Q2 Results

With a market capitalization of $44.3 billion, more than $617.1 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 gross margin this quarter. And we were also excited to see the really strong revenue growth. On the other hand, it was unfortunate to see that the revenue guidance for the next quarter missed analysts' expectations and operating margin deteriorated. Overall, it seems to us that this was a complicated quarter for Marvell Technology. The company is down 5.02% on the results and currently trades at $52.37 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 solid, though we don't expect it to maintain historical growth rates. But while its gross margins are suggestive of good pricing power, 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 21.1x. 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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