Although Marvell (MRVL -4.77%) might have the best long-term growth potential of all semiconductor companies, its fundamentals succumbed to the worsening economy in 2022, and the stock plunged 58%. Consequently, many investors in 2021 that pictured nothing but rapid growth ahead are now weeping at their losses.
Considering that the economy is worsening and many economists and business leaders believe the global economy is on the brink of recession, should you give this stock a pass right now, or use the decline over the past year to buy shares of an excellent company while it's down?
Let's take a look.
Transforming into a data infrastructure company
In 2016, a new management team began transforming Marvell from a maker of hard drives, Wi-Fi devices, and multimedia solutions to a pure play on data infrastructure. Today, the company focuses on storage, networking, computing, and security, the core technology needed for infrastructure powering the data economy.
Marvell made the pivot to data infrastructure at the right time. The global economy survived COVID-19 mainly because people could remain connected during the pandemic through the infrastructure products that this company manufactures. Additionally, the pandemic helped its business by accelerating key trends like 5G, cloud computing, and autos, which are significant drivers of its revenue growth.
For example, during the bull market in 2021, the company's cloud, 5G, and automotive end markets collectively doubled in revenue year over year, helping increase Marvell's revenue to $4.46 billion, up 50% over the previous year -- and enticing investors to bid the stock up 84% in 2021.
Today the market is looking at profits more than growth
Investors become more concerned about profits than revenue growth when interest rates rise, and the Federal Reserve raised interest rates faster than it had in decades in 2022.
Unfortunately for Marvell, its bottom-line gains looked paltry last year, and Wall Street became disenchanted with the company.
The chart below shows its net income over the last three years on a quarterly and trailing-12-month (TTM) basis.
MRVL Net Income (TTM) data by YCharts
Another demerit for the company is that rising interest rates eventually resulted in a slowing economy, which then led to decelerating revenue growth for Marvell.
Revenue growth fell from a blistering 61% year over year in the third quarter of fiscal 2022 to 27% in fiscal 2023 Q3. Worse, management expects year-over-year growth to decelerate further in the fiscal 2023 fourth quarter to 4% from 68% in the previous year. In short, growth has hit a wall. Yikes!
If you invest in Marvell, understand that you may only start seeing the stock price recover substantially after revenue growth reaccelerates.
Why bulls are buying this stock
Bulls are currently buying the stock because they recognize that although the awful economy might have derailed the growth story temporarily, once the economy rebounds, Marvell has many powerful catalysts. For instance, one significant growth driver is the enterprise market's upgrade cycle in networking equipment.
To operate more efficiently, today's companies need to modernize older networking infrastructure to support the new hybrid work environment. This new network requires increased security, flexible remote access, the ability to carry large amounts of high-bandwidth video, and state-of-the-art digital capabilities -- all features that Marvell can help its customers build into their data infrastructure.
Many businesses were in the process of revamping their networking infrastructure when the macroeconomic environment deteriorated, halting planned spending. However, the need for businesses to upgrade their networks has remained. Once the global economy rebounds and companies' budgets improve, Marvell's enterprise networking chip business should be in high demand. As a result, shareholders should expect this segment to reaccelerate revenue growth after the economy receives the all-clear signal from Wall Street.
The cherry on top is that Marvell has several more high-growth business opportunities that should also rapidly accelerate revenue once the economic situation improves.
In addition, the company displayed substantial operating leverage in its business model in the latest quarter, meaning profit growth is turbocharged when revenue increases. Therefore, once the economy turns favorable, shareholders can look forward to seeing rapid profit expansion once the company reaccelerates revenue growth.
Should you buy the stock?
Suppose you can withstand volatility in the market over the next 12 to 18 months. Then, considering the stock's high upside potential and significant price decline over the past year, today presents a magnificent opportunity to buy.
