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This Hot 5G Stock Could Be a Terrific Buy

By Harsh Chauhan - Mar 1, 2021 at 7:00PM

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High expectations and supply constraints could be near-term headwinds for this chipmaker, but investors should focus on the bigger picture.

Marvell Technology Group (MRVL -4.07%) has been in terrific form on the stock market over the past year, with shares of the chipmaker doubling thanks to tailwinds in the networking and storage businesses.

MRVL Chart

MRVL data by YCharts

Marvell's impressive rally will be put to test on March 3, when the company releases its fourth-quarter results for its fiscal year 2021. Let's see what's expected and look at whether the chipmaker's results and guidance are likely to be strong enough to help it sustain its momentum.

Hand holding smartphone with 5G hovering over it

Image source: Getty Images.

Marvell Technology has its work cut out for it

Marvell Technology's third-quarter results disappointed investors in December. The chipmaker's impressive top- and bottom-line growth failed to match Wall Street's expectations as supply constraints affected sales of its networking products.

The fourth-quarter revenue guidance also turned out to be softer than expected. Marvell expects $785 million in revenue (plus or minus 5%) for the recently concluded quarter at the midpoint of its guidance range. That would translate into a year-over-year gain of almost 10%. Analysts are expecting the company to deliver nearly $795 million in revenue.

The consensus earnings estimate of $0.29 per share is in line with the midpoint of Marvell's guidance range of $0.25 to $0.33 per share. It also points toward substantial gains over the prior-year period's figure of $0.17.

Marvell will have to turn in a better-than-expected top-line performance to keep investors in good humor. The Wall Street guidance is certainly within Marvell's reach, as the upper end of its revenue expectation sits at $824 million.

It is also worth noting that the chipmaker may have issued cautious revenue guidance considering the supply constraints it is facing. Marvell had explained on its December 2020 earnings conference call that it is working "closely with our supply chain partners to alleviate constraints and meet the growing demand from our customers."

A successful production ramp will be a tailwind for Marvell and help it meet or exceed revenue expectations. Failure to do so could send the stock down, but that could also open an opportunity for savvy investors to buy a top growth stock at an attractive valuation.

Why it makes sense to buy on a dip

Marvell Technology stock trades at 23 times trailing earnings, which seems reasonable considering that the multiple is lower than its five-year average price-to-earnings (P/E) ratio of 44. A post-earnings dip would make the stock more affordable, and a look at the bigger picture indicates why that may be a buying opportunity.

Marvell supplies chips that are used in two fast-growing verticals -- networking and storage. The networking business -- accounting for 59% of the total revenue -- has been in fine form of late thanks to the growing demand from data centers and 5G wireless networks.

Marvell's networking revenue shot up 35% year over year in the fiscal third quarter. The company is confident of maintaining momentum thanks to a bunch of solid catalysts. For instance, Marvell has been shipping its 5G ASICs (application-specific integrated circuits) to Samsung and started shipments to Nokia last quarter.

Supplier relationships with these two companies bode well for Marvell from a long-term perspective for a couple of reasons. First, the 5G base station market is growing at a terrific pace, which means that demand for ASICs used in these base stations will continue to remain strong. Second, Samsung and Nokia are big players in the global telecom equipment market with a combined market share of nearly 30%, as reported by market research firm Dell'Oro.

Meanwhile, Marvell's cloud business is also gaining impressive traction thanks to its recently launched data processing unit platform that opens another exciting opportunity for the company.

The chipmaker estimates that the 5G and cloud growth drivers discussed above will help it achieve 25% year-over-year revenue growth in the networking segment in the fiscal fourth quarter. However, these markets will drive Marvell's growth beyond just one quarter and strengthen its bottom line over the long run.

MRVL EPS Estimates for Current Fiscal Year Chart

MRVL EPS Estimates for Current Fiscal Year data by YCharts

What's more, analysts expect Marvell's revenue to grow at a faster pace of over 16% in the fiscal year that has just begun. That would be a big improvement over the most recent year's estimated top-line growth of 10.5%.

Marvell Technology is about to switch up a gear in the new fiscal year, and it could keep growing at a fast clip thanks to the markets it operates in. That's why buying Marvell's dip in the event of a weaker-than-expected quarterly report would be a smart thing to do.

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