Marvell Technology's (MRVL -0.19%) stock is up nearly 50% over the past three years and outperformed the S&P 500's gain of about 30%. The chipmaker grew rapidly through acquisitions and sold plenty of chips for the cloud, 5G, automotive, enterprise networking, and AI markets.
Given all this past growth, can its stock keep rising over the next three years?
What does Marvell Technology do?
Marvell's data processing units (DPUs) bundle together CPUs, networking interfaces, and programmable data acceleration engines. It also sells other types of infrastructure, Wi-Fi, and custom chips, as well as networking and storage solutions.
Image source: Getty Images.
Marvell is a fabless chipmaker that outsources its production to third-party foundries like Taiwan Semiconductor Manufacturing. It also constantly expands its portfolio through acquisitions. In just the past three years, it acquired Inphi, which develops mixed-signal integrated circuits; Innovium, which develops networking solutions for data centers; and Tanzanite, which develops technologies for optimizing workloads across data centers.
How fast is Marvell Technology growing?
From fiscal 2017 to fiscal 2021 (which ended in January 2021), Marvell's revenue grew at a compound annual growth rate (CAGR) of 7% as its earnings per share (EPS) increased at a CAGR of 10% on a non-GAAP (generally accepted accounting principles) basis. That growth included its $5.5 billion acquisition of Cavium in July 2018. From fiscal 2017 to fiscal 2021, Marvell's non-GAAP gross margin expanded from 55.9% to 63.3% as its non-GAAP operating margin rose from 14.7% to 24.2%.
In two of the past three fiscal years, Marvell's revenue growth accelerated as its margins expanded. Its adjusted earnings and its earnings before interest, taxes, depreciation, and amortization (EBITDA) also grew at a steady rate.
|
Metric |
FY 2022 |
FY 2023 |
FY 2024 |
|---|---|---|---|
|
Revenue growth |
50% |
33% |
(7%) |
|
Non-GAAP gross oargin |
64.9% |
64.5% |
61.2% |
|
Non-GAAP operating margin |
32.8% |
35.5% |
29% |
|
Non-GAAP EPS growth |
71% |
35% |
(29%) |
|
EBITDA growth |
89% |
39% |
(21%) |
Data source: Marvell, MarketScreener.
In fiscal 2022, Marvell's revenue surged for two reasons: It acquired Inphi and Innovium, and it organically expanded its cloud, enterprise networking, 5G, and automotive chipmaking businesses. That momentum continued throughout most of fiscal 2023, but its growth cooled off by the end of the year as the macro headwinds intensified.
Throughout most of fiscal 2024, the weakness of Marvell's carrier, enterprise networking, consumer, automotive, and industrial end markets offset the robust growth of its cloud, data center, and AI-oriented businesses. However, many of those higher-growth markets were also lower-margin ones that reduced its total gross margins.
What will happen to Marvell over the next three years?
Like many other chipmakers, Marvell expects the secular expansion of the AI market to drive its long-term growth. AI chips accounted for more than 10% of its total revenue in fiscal 2024, up from about 3% of its revenue in fiscal 2023.
During Marvell's fourth-quarter conference call in early March, CEO Matt Murphy called AI a "key growth driver" that would "continue driving another strong year" for its data center end market. Murphy expects most of that growth to come from optical products tethered to shipments of AI accelerators like Nvidia's GPUs.
As Marvell expands its AI-oriented businesses, its weaker markets could stabilize as the macro headwinds dissipate. From fiscal 2024 to fiscal 2027, analysts expect its revenue to grow at a CAGR of 15% as its EBITDA increases at a CAGR of 24%.
But based on those estimates, Marvell's stock isn't cheap at 13 times this year's sales and 37 times its EBITDA. Those valuations might have been inflated by the ongoing buying frenzy in AI stocks and hopes for interest rate cuts later this year. A year ago Marvell was only trading at 20 times its forward EBITDA. Two years ago that forward ratio was at 28. That might be why Marvell's insiders sold more than 1.2 million shares over the past 12 months but didn't buy a single share.
Marvell's stock still has room to run
I believe Marvell's valuations will pull back toward its historical levels even if it matches Wall Street's targets over the next three years. Assuming it clears those goals and trades at a more reasonable 25 times its EBITDA by the beginning of calendar 2027 (the end of fiscal 2027), its stock would be trading at about $100 a share.
That would be a decent 36% gain from Marvell's current price, but it might not be enough to satisfy growth-oriented investors who are looking for the next Nvidia. Therefore, investors should recognize Marvell for what it is -- a stable blue chip semiconductor stock -- instead of a hypergrowth play on the booming AI market.
