It's proving a tough year in tech and semiconductor stock Marvell Technology Inc (NASDAQ: MRVL) is down 33% year-to-date. With official data pointing at continued semiconductor demand, is MRVL stock now a buy?
An ongoing chip shortage is muddying the outlook for continued demand, making the investor decision-making process more difficult.
What is Marvell Tech?
Servicing all the current tech buzzwords (AI, 5G, Drones, Data Connectivity, Cloud Computing, EVs and Smart-Automobiles), Marvell Technology Inc (NASDAQ: MRVL) is an American semiconductor company with several product lines.
Its line of semiconductors creates high-speed connectivity for use across computing, networking, storage, and custom solutions.
Marvell first revolutionized the digital storage industry by moving information at speeds never thought possible.
Examples of these products include Marvell's various platforms for wireless infrastructure, networks, enterprise, and cloud data centers, along with transceivers, bridges, and switches for vehicle networking. Plus, it offers a variety of storage solutions from fiber to HDD and SSD and custom government solutions.
Explosive mobile data growth drives demand for distributed smart 5G architectures with improved performance and lower cost. Marvell's product suite offers innovative solutions to this end.
Is now a good time to buy tech stocks?
The tech selloff has caused many investors to run for cover, but now traders ask, 'when does growth become value?' Some of the largest companies in the tech space have taken a steep drop, while the smaller companies have plummeted.
Meta (NASDAQ: FB), Alphabet (NASDAQ: GOOGL), Microsoft (NASDAQ: MSFT), Amazon (NASDAQ: AMZN), Nvidia (NASDAQ: NVDA) and Netflix (NASDAQ: NFLX) have long been high flyers in tech. Just last year, these companies could have been considered both growth stocks and defensive, but even they've endured a brutal selloff in these turbulent times.
Unfortunately, inflation is a scary beast that carries mounting input costs for most businesses. This puts pressure on margins and makes future growth prospects less knowable.
Stock traders remain split on whether the selloff is ending, making it hard for investors to decide whether this is a good time to buy MRVL stock.
Is Chip Demand Slowing?
Semiconductors have seen soaring demand in recent years. Indeed, semiconductor sales exceeded half a trillion dollars last year, selling 11.5 trillion semiconductors to global customers.
China is the world's largest computer chip market, while America sees considerable growth.
However, some analysts question whether this is sustainable, and a slowdown in demand could result in oversupply and plummeting prices.
That's what happened in 2018, when excessive demand for semiconductors abruptly slowed, leading to oversupply. It appears anticipation of this scenario may have contributed to plummeting chip stock prices this year, despite an ongoing supply shortage.
The PHLX Semiconductor Index is down 24% since its December high of $4,039.51.
As value investors seek to buy the dip, a severe drop in an index like this should signal a time to purchase semiconductor stocks, but there's clearly apprehension at play.
Despite evidence of strength in demand, there's concern that inflation and stockpiling could lead to surplus supply. This would suppress chip prices and even cause them to fall.
Evercore ISI analyst C.J. Muse recently wrote:
From an investment perspective, semiconductor stocks are almost uninvestable today… investors want to buy the ‘cut,’ but that ‘cut’ may not happen until 2H22 at the earliest.
With this concern at the fore, extreme volatility will likely persist in semiconductor stocks until inventories and demand align more clearly.
Is Marvell Seeing Inventories Building?
Marvell's supply is suffering from a long lead time, so there are concerns customers will be ordering to cover themselves.
In its Q1 earnings call, CEO and Director Matthew Murphy noted the company is not 'swimming in capacity.' But he has looked for signs of customer inventory building up and doesn't see it.
However, the consumer segment, which accounts for 12% of the business, is slowing down. As consumers return to an average pace of life and budget tightening, there's likely to be less demand for PCs, tablets and in-home gadgets.
Mr. Murphy concluded that demand signals seem strong across cloud companies, 5G business, enterprise, and wired. Therefore, he sees plenty of opportunities ahead.
MRVL Growth Potential
Marvell anticipates the adoption of Compute Express Link (CXL) will buck a new trend in semiconductor demand. CXL is an industry-standard for connecting processors, accelerators, and memory.
The company says silicon components based on CXL will facilitate new cloud architectures by helping scale memory capacity.
Marvell is uniquely positioned to address the CXL opportunity given its deep relationships with memory OEMs, a growing position within hyperscale customers, and advanced PCIe road map.
The company projects continued growth in Q2.
Matt Murphy, President & CEO, wrote in his annual letter to shareholders:
As we enter fiscal 2023, we believe Marvell is poised for accelerated growth and leadership across the semiconductor industry’s most exciting and high growth end markets.
Strengthening US Chip Control
There's an ongoing push to strengthen U.S.-based chip research, design, and manufacturing.
John Neuffer, president and CEO of the Semiconductor Industry Association (SIA), recently commented:
For America to continue to set the global standard economically, militarily, and technologically, we must strengthen U.S. leadership in semiconductors,
Global semiconductor sales appeared strong in Q1, 2022, rising 23% Y/Y.
According to SIA data, global sales for March 2022 stood at $50.6bn, with America displaying 40.1% growth Y/Y.
Improving computer power is vital to making meaningful AI advances, smart cars, and augmented and virtual reality. And this is wholly reliant on the availability of semiconductors.
For this reason, MIDF Research is optimistic in its outlook for the semiconductor industry:
we remain positive that this sector is still set for explosive growth due to its adoption and integration, eclipsing all other sectors, including the financial and the industrial ones.
Furthermore, Congress is advancing legislation to ensure US chip control improves.
Senator Mark Warner stated:
Semiconductors underpin America’s economy, national security, and leadership in the technologies that will determine our future, including autonomous vehicles, supercomputing, virtual and augmented reality, IoT devices, and more,
To sharpen America’s edge in semiconductor technology, we need to enact final innovation and competitiveness legislation that incentivizes domestic chip manufacturing, invests in U.S. chip research, and promotes greater semiconductor design investments in the U.S.
Marvell Technologies enjoyed record revenue in Q1, fiscal 2023 of $1.45bn. This equates to 8% sequential growth and 74% Y/Y.
The company saw continued strength in bookings in its data infrastructure end market, where data center sales primarily drove higher revenue success.
The supply-chain disruption led to a disappointing quarter in enterprise networking. But growth remains robust in this segment, with revenue growing 64% Y/Y and 9% sequentially.
The company's forward price-to-earnings ratio (P/E) is 23.
Marvell's price-to-sales ratio (P/S) is 9.8. This indicates that investors are investing $9.80 for every $1 the company earns in revenue. In comparison, ON Semiconductor Corp (NASDAQ: ON) has a P/S of 4.1 and Microchip Technology Inc (NASDAQ: MCHP) has a P/S of 5.8.
Marvell's gross margin has been squeezed this past year. It sat around 50% from 2019 through to 2021 but dropped to 46% in the fiscal year 2022. But revenues took a big jump, with sales up over 50%. This is a positive sign of growth that investors like to see.
In its most recent quarter, gross profit rose 79.5% Y/Y.
The company continuously evaluates its existing operations to increase operational efficiency, decrease costs and increase profitability. It is a fan of M&A and believes its past M&A efforts are beginning to pay off.
Risks to Investing in MRVL
In Q2, company revenue guidance projects growth of 41% Y/Y. It expects strong operating leverage in its business model to drive non-GAAP EPS at the midpoint of guidance to grow by 65% Y/Y, significantly faster revenue.
Marvell's unique product cycles have been a big part of its above-market revenue growth. It expects this to continue in its cloud, 5G, auto and enterprise networking end markets.
Should you invest in Marvell?
Inflation, war and ongoing supply chain disruption affect supply and demand. Marvell operates in multiple countries and changing tax laws could adversely impact its financial results, including earnings and cash flow.
If inflation gets out of control, demand for goods will slow and thus demand for semiconductors. There's also a concern of stockpiling suppressing chip prices.
A cyclical downturn in semiconductors usually comes from high inventory, excess production capacity, and demand to slow down. So, these are things to watch out for.
However, FactSet analyst consensus has slated MRVL stock as a Buy with a target share price of $86.67. Several analysts have recently cut their share price targets while retaining a positive outlook on the stock.
Meanwhile, some bullish narratives prevail, and there are signs high inflation may not persist.