Marvell Technology Group (MRVL 3.17%) hasn't received much love from Wall Street this year. The chipmaker has underperformed the broader NASDAQ-100 Technology Sector index by a wide margin even though it has been pulling the right strings to secure long-term growth.
As of this writing, Marvell stock is trading close to its 52-week lows, but that could soon change. The company's latest earnings report revealed that it is going to enjoy stronger earnings power, and it shouldn't be long before the market starts rewarding Marvell.
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The key catalyst
Marvell recently completed the $6 billion acquisition of Cavium to complement its existing business lines. The company currently gets the majority of its revenue by selling storage, wireless connectivity, and networking solutions. These markets give Marvell an addressable revenue opportunity of $8 billion.
Through Cavium, Marvell has now bought its way into the data center switching, storage connectivity, and next-generation network computing markets. This move has boosted the company's addressable market to $16 billion. This is a big deal, as the company has generated $2.5 billion in revenue over the past four quarters, setting the stage for solid top-line growth.
More importantly, the acquisition could give Marvell's bottom line a nice shot in the arm. The chipmaker was originally expecting the combined company to deliver annual cost synergies of $150 million to $175 million within 18 months after the close of the acquisition. But Marvell has now increased that target to an annual cost-saving run rate of $200 million, and it expects the gains to start showing up soon.
Marvell believes that a fourth of the annual cost savings synergies will come from a reduction in the cost of goods sold, which typically takes around six months to take effect. The remaining gains will come from a reduction in operating expenses, so it won't be surprising to see an improvement in the company's margin profile.
The good part is that Marvell's margin profile was in strong shape even before the acquisition was completed. Last quarter, its non-GAAP operating margin shot up 4.3 percentage points annually, while non-GAAP gross margin increased 2.3 percentage points. In fact, Marvell's margins have been trending higher for quite some time.
MRVL Gross Profit Margin (TTM) data by YCharts
Not surprisingly, analysts estimates, as compiled by Yahoo! Finance, are that the company's earnings will increase at a compound annual growth rate of more than 14% for the next five years. By comparison, its earnings have increased by just 1.3% a year over the past five years. So Marvell looks all set to amplify its top- and bottom-line growth, paving the way for more stock upside in the process.
Getting into attractive markets
Margin improvement will set the stage for profitable long-term growth, as the chipmaker taps into fast-growing markets such as baseband processors, data center switches, and network storage.
The baseband processor market, for instance, is growing at an annual pace of nearly 14%. However, it could get better as the transition to fifth-generation (5G) wireless technology begins. Similarly, the size of the data center switching market is expected to increase by $5 billion over the next five years, according to one estimate.
Marvell has a better chance of attacking these opportunities after acquiring Cavium. For instance, the company didn't have a presence in the data center switching market earlier, nor was it present in the network storage space. But Cavium has an expansive line of data center products that'll complement Marvell's existing enterprise offerings. This should not only help Marvell score new customers, but also boost its business at existing Cavium accounts.
A smart bet
We have already seen that Marvell Technology is on track to get a bottom-line boost. This makes it a solid bet considering the stock's valuation right now. Marvell stock has a trailing price-to-earnings (P/E) ratio of 26 and a forward P/E ratio of less than 13, giving a clear indication that its earnings are expected to increase.
More importantly, Marvell's forward P/E ratio is lower than the industry's median P/E ratio of nearly 20. So, investors are getting a good deal on Marvell's shares, as the stock looks all set to rally from its 52-week lows thanks to the catalysts it is sitting on -- and it isn't too expensive, either.
