Marvell Stock: Strong Growth Does Not Support Higher Valuations

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Marvell Technology Group operating headquarters in Silicon Valley

Sundry Photography/iStock Editorial via Getty Images

In our previous analysis on Marvell Technology Inc (MRVL), we analyzed the company’s acquisition of electro-optics supplier Inphi for data centers and estimated the incremental revenue growth to the company of 8% on average through 2025 from the acquisition. Moreover, we also analyzed its flash storage controller segment and identified its leading market position, serving key SSD and HDD customers such as Seagate (STX), Toshiba (OTCPK:TOSBF), and Western Digital (WDC). We also looked into its broad range of networking products such as Ethernet PHY, SerDes, custom ASIC and DPUs that have been driving demand for cloud computing and 5G.

In this analysis, we analyzed the acquisition of Innovium, and determined that it would add incremental annual revenues of $150 mln by FY2023 to its data center segment. Moreover, we determined the cost advantage of ASIC compared to FPGAs and because of the incremental costs for higher power consumption associated with FPGAs, as well as Marvell’s performance advantage in DPU. We expect this to translate to higher revenue growth from these two products in the Carrier Infrastructure segment. Finally, we expect its automotive segment growth to be driven by the rise of automotive ethernet connections and its customer base of some of the largest automakers and automaker suppliers.

Marvell revenue by end segments

Marvell

Innovium Acquisition Builds on Data Center Portfolio and Incremental Revenue Growth

Marvell completed the acquisition of Innovium in October 2021 for $1.1 bln in stock. Innovium produces switch ASICs for ethernet in data centers. According to 650 Group in the chart below, the company competes against Broadcom (NASDAQ:AVGO) which dominates the data center switch ASIC market with a share of 70% compared to 29% for Innovium. Therefore, by acquiring Innovium, Marvell competes with Broadcom in the switch ASIC market.

Marvell Innovium

Innovium

According to the company’s management, the deal is expected to contribute to revenues in the next fiscal year and serve cloud customers as explained by its CEO in the following quote.

We expect the acquisition of Innovium will result in $150 million in incremental revenue next fiscal year as we ramp switches into a large Tier-1 cloud customer they had won prior to the acquisition. – Matt Murphy, President and Chief Executive Officer of Marvell

Furthermore, Marvell plans to integrate Innovium and Inphi products to deepen its customer relationships with cloud computing customers. Based on its Capital Markets Day 2021 presentation slide below, Marvell is working to co-package Inphi’s optics with Innovium’s switch ASIC.

Complete cloud data center networking portfolio

Marvell

With the inclusion of Innovium’s switch ASIC products, the company builds on its data center product portfolio consisting of DSP chipsets, DCI modules, OCTEON DPUs, custom ARM server CPUs and ASICs, as well as flash and HDD storage controllers.

Thus, as projected in our previous analysis, we forecasted the cloud market to grow by an average of 23% through 2025 driven by the growth of data volumes with the rise of technologies such as 5G, AI and IoT. Furthermore, we projected the growth rate of the cloud capex with an average of 21.9% through 2025 based on the share of top cloud providers capex to cloud market revenues.

cloud market and capex projections

Khaveen Investments

* a = b x c

*d = e x f

To project its data center revenue growth, we applied our forecast of the cloud market capex driven by the growth of data volumes. In addition, we factored in the $150 mln incremental revenue expectation in FY2023 with FY2024 being prorated for one quarter.

Marvell Data Center Revenues ($ mln)

2021

2022F

2023F

2024F

2025F

2026F

Data Center

1,041

1,614

1,962

2,410

2,919

3,563

Growth %

55.1%

21.5%

22.9%

21.1%

22.0%

Innovium Revenue

38

150

184

223

272

Growth %

300.0%

22.9%

21.1%

22.0%

Total

2,969

4,197

5,089

6,083

7,233

8,631

Innovium Revenues as % of Total Revenues

0.0%

0.9%

2.9%

3.0%

3.1%

3.2%

Source: Marvell, Khaveen Investments

Overall, we expect the acquisition of Innovium to complement its data center portfolio to serve its cloud customers and benefit the company with incremental revenues of $150 mln. We expect the deal to build on its data center portfolio as highlighted by management of the product integration with existing products, and we projected its growth based on our projections of the cloud market from previous analysis with the rise of data volumes expected to benefit the company.

5G To Drive Carrier Infrastructure Segment Growth

According to semiconductor industry expert Rajeev Jayaraman, although FPGA provides advantages such as shorter time-to-market, more flexible and simpler design, ASIC could be produced with lower costs in high volume. Moreover, ASIC is also more power-efficient as it consumes less power to provide the same performance as FPGA. The chart shows the expected cost curve for FPGAs being steeper than ASICs as the cost rises as volume increases.

FPGA vs ASIC cost analysis

NUMATO

We believe that the forecast of the incremental FPGA cost as volume increases higher than ASICs is right based on Samsung’s (OTC:SSNLF) explanation that FPGAs were generally used in early 5G deployments due to their programmability and flexibility. However, the installation of multiple FPGAs to process more data leads to higher power consumption and cost challenges with the associated trade-off of FPGAs between programmability and cost. Additionally, as explained by Nokia’s (NOK) CEO, the company is shifting from FPGAs to SoCs due to the cost.

So, what’s happening right now is, when we move to 5G, we chose FPGA based products. They give you flexibility. They give you time-to-market advantage, but then they’re expensive. And so, what we’re doing is, we’re moving to SoC-based products, which will progressively start shipping during 2020. – Rajeev Suri, President and Chief Executive Officer of Nokia

Marvell has entered a partnership with Nokia to develop custom SoC products using its Arm processor technologies. Moreover, Marvell also introduced its latest OCTEON 10 DPU based on TSMC’s (TSM) 5nm node with 3 times better performance than the previous OCTEON product with only half of its power consumption. Management expects the company to benefit from ramping its OCTEON 10 shipments to Nokia in FY2024 for its 5G base station.

In terms of competition in DPU, we ranked Marvell as the leader in performance for DPUs with Ethernet capabilities of up to 400 Gbps and PCIe Gen 5. In comparison, NVIDIA (NVDA), Fungible and Kalray’s products support up to 200 Gbps and have PCIe Gen3/Gen4 support. However, in terms of each company’s roadmap, we ranked Nvidia as the leader with its BlueField-4 outlined to be released in 2024 capable to up to 800 Gbps followed by Marvell plans to develop 3nm chips.

DPU Ranking

Performance

Roadmap

Marvell

1

2

Nvidia

2

1

Fungible

2

3

Kalray

2

3

Source: Khaveen Investments

According to the IHS, the 5G equipment market is forecasted to grow by 22.6% in 2022 as the deployment of 5G networks continue. In relation, Gartner estimates the share of 5G networks to increase to 60% by 2024 from 10% in 2020. We forecast its Carrier Infrastructure segment to increase by 22.6% based on the 5G equipment market forecast in 2022 and tapering down by 1% per year as the deployment of 5G networks matures.

Marvell Carrier Infrastructure Segment ($ bln)

2021

2022F

2023F

2024F

2025F

2026F

Carrier Infrastructure revenue

599.5

772.4

947.0

1151.6

1388.8

1661.0

Growth %

28.8%

22.60%

21.6%

20.6%

19.6%

Source: Marvell, PulseNewsKorea, Khaveen Investments

Overall, we expect the company to benefit from the shift from FPGA in early 5G infrastructure deployments to custom SoCs such as Marvell’s products as seen with its Nokia customer example due to the cost limitations of FPGAs. Moreover, we believe its development of DPU SoCs for 5G could provide greater opportunities for the company to benefit from the deployment of 5G networks.

Riding The Automotive Connectivity Wave with Key Automotive Customers

Marvell’s automotive segment is the smallest among all its segment which only accounts for 3.97% of its FY21 revenue. However, it has the highest growth among all other segments with an average growth of 16.18% for the past 7 quarters based on its Q2 and Q3 2022 quarterly earnings releases.

Marvell’s End Market Revenue Growth%

Q1 21

Q2 21

Q3 21

Q4 21

Q1 22

Q2 22

Q3 22

Average

Data Center

2.51%

0.55%

-10.40%

12.55%

2.93%

56.54%

15.22%

11.41%

Carrier infrastructure

8.51%

16.52%

18.36%

-1.38%

0.79%

17.36%

9.38%

9.93%

Enterprise Networking

3.01%

-0.14%

0.54%

1.12%

8.79%

27.39%

10.99%

7.39%

Consumer

-28.42%

11.70%

13.32%

10.13%

-0.61%

-0.77%

10.37%

2.25%

Auto/Industrial

12.41%

-6.76%

22.40%

8.87%

35.84%

24.39%

16.12%

16.18%

Source: Marvell

According to Yano Research, the number of ethernet nodes from 2016 is forecasted to exceed 200 mln in 2020 with growing applications in camera systems and infotainment. Additionally, Strategy Analytics forecasts demand for automotive ethernet ports to increase to 350 mln by 2022. Based on Marvell’s automotive product portfolio, its Brightlane ethernet chips are targeted for ADAS and in-vehicle infotainment. Thus, we believe that this places Marvell to benefit from its portfolio of automotive ethernet with ADAS applications catering for the growth in camera systems and in-vehicle infotainment applications for vehicle infotainment systems.

As a testament to Marvell’s automotive ethernet capabilities, Nvidia, a global leader in ADAS technology, leverages Marvell’s ethernet solutions for its ADAS platform as described in the quote below.

The DRIVE Orin platform can scale from level 2 to level 5 autonomy by aggregating multiple ECUs over a highspeed network. Leveraging Marvell’s latest 10Gbps Ethernet PHY, NVIDIA can provide high-speed connectivity at multi-gig speeds to enable load balancing with low latency, delivering enormous performance capability. – Michael Truog, senior director of Automotive Platform Architecture at Nvidia

Furthermore, we believe the company’s automotive ethernet strengths are its customer relationships with leading global automakers. Based on the diagram below, the company has at least 36 automakers as customers. Based on data from Auto Punditz, it has relationships with 10 out of the top 10 global automakers by sales volume including Toyota (TM), Volkswagen (OTCPK:VWAGY), Renault (OTC:RNSDF), Nissan (OTCPK:NSANY), General Motors (GM), Hyundai (OTCPK:HYMTF), Stellantis (STLA), Honda (HMC), Ford (F), Daimler (OTC:DTRUY) and Suzuki (OTCPK:SZKMF).

Marvell - Automotive Ethernet Adoption

Marvell

Underpinned by the increasing demand for automotive ethernet for ADAS and infotainment applications, we projected Marvell’s automotive segment growth based on the forecast of ethernet by Strategy Analytics reaching 350mln ethernet ports by 2022, which translates to a CAGR of 32.3% we derived from 200 mln ethernet ports in 2020 and tapering down by 1% through 2025.

Marvell Automotive Segment Revenues ($ mln)

2021

2022F

2023F

2024F

2025F

2026F

Revenue

118.0

226.9

300.2

394.1

513.6

664.0

Growth %

92.3%

32.30%

31.30%

30.30%

29.30%

Source: Marvell, Strategy Analytics, Khaveen Investments

We expect its automotive segment growth to be driven by rising ethernet demand in automotive connectivity technologies to support ADAS and infotainment applications. In addition, we also believe that its customer relationships with global automakers could benefit its automotive segment growth serving the top 10 largest automakers by sales volume.

Risks: Greater Competition From Broadcom and Nvidia

As mentioned in the Innovium acquisition point, Broadcom dominates the market with 70% market share whereas Innovium has a 29% market share. This highlights the competition heating up between Marvell and Broadcom in data center. While Marvell built up its product portfolio with acquisitions, it is still smaller than larger competitors including Broadcom. Additionally, Nvidia has expanded aggressively in the data center market. The company is developing its Bluefield DPUs with a roadmap to launch its Bluefield 4 DPUs in 2024 with 100 TOPS and 800 Gbps ethernet capabilities. In the table below, we compiled the revenues of Marvell’s and Nvidia’s Data Center segment and Broadcom’s networking revenues representing 34% of its semiconductor revenues.

Company

2021 Revenue ($ mln)

Marvell (Data Center Segment)*

1,614

Nvidia (Data Center Segment)

10,613

Broadcom (Networking Segment)

6,930

*forecast

Source: Marvell, Nvidia, Broadcom

Overall, we believe that despite the expanded product portfolio of the company, it still faces significant risks from larger competitors including Broadcom and Nvidia, especially in the data center and networking markets where both Nvidia and Broadcom are larger in terms of revenues.

Valuation

Marvell’s average FCF margin was 6.48% for the past 5 years. Marvell completed the acquisition of Cavium in FY2019 for $6.1 bln. Excluding acquisitions, the company has positive FCF margins.

Marvell cash flows

Marvell, Khaveen Investments

Due to acquisitions, Marvell’s leverage has been increasing from $337 mln net cash in 2017 to $1,328 mln net debt in 2021, which is around 1.9% of its market cap. Its EBITDA interest coverage ratio also decreases from 864.3x in 2017 to 9.2x in 2021.

We valued the company with a DCF valuation as we expect it to continue generating positive FCFs. We based the terminal value on the semicon chipmakers with an average EV/EBITDA of 24.15x.

Marvell - industry average EV/EBITDA

Seeking Alpha, Yahoo Finance, Khaveen Investments

We projected its revenues based on its revenue by end market customer segments. For the Data Center and Innovium revenue of $150 mln, we applied our forecast of the cloud market capex growth based on our previous analysis. The Carrier Infrastructure segment is based on the IHS Markit growth forecast of 22.6% and we tapered it by 1% per year. The Enterprise Networking segment is based on the enterprise communications market CAGR of 17.53% through 2026 and the Consumer segment on the consumer electronics market CAGR of 4.9% through 2027. Finally, for the automotive/industrial segment, we applied our derived growth forecast as mentioned in the third point.

Marvell Revenue By End Markets ($ mln)

2021

2022F

2023F

2024F

2025F

2026F

Data Center

1040.7

1614.0

1961.5

2410.4

2919.3

3562.5

Growth %

55.1%

21.5%

22.9%

21.1%

22.0%

Innovium Revenue

37.5

150

184.3

223.2

272.4

Growth %

300%

22.9%

21.1%

22.0%

Carrier Infrastructure

599.5

772.4

947.0

1151.6

1388.8

1661.0

Growth %

28.8%

22.60%

21.6%

20.6%

19.6%

Enterprise Networking

636.0

859.7

1010.4

1187.5

1395.7

1640.4

Growth %

35.2%

17.53%

17.53%

17.53%

17.53%

Consumer

574.6

686.1

719.7

755.0

792.0

830.8

Growth %

19.4%

4.90%

4.90%

4.90%

4.90%

Auto/Industrial

118.0

226.9

300.2

394.1

513.6

664.0

Growth %

92.3%

32.30%

31.30%

30.30%

29.30%

Total

2968.9

4196.7

5088.9

6083.0

7232.6

8631.2

Total Growth %

41.4%

21.3%

19.5%

18.9%

19.3%

Source: Marvell, Mordor Intelligence, MarketWatch, Khaveen Investments

Based on a discount rate of 10.3% (company’s WACC), our model shows the company being fairly valued.

marvell stock valuation

Khaveen Investments

Verdict

In this analysis, we analyzed its acquisition of Innovium as well as its carrier infrastructure and automotive segments. With the completion of its Innovium deal, in addition to the $150 mln incremental revenue in FY2023 expected by management, we highlighted its integration between its Inphi products and expansion of its data center portfolio which we expect its growth to be driven by the growth of data volumes. Moreover, we analyzed its carrier infrastructure segment where we believe it stands to benefit from 5G network deployments as its ASICs and DPU chips have more cost advantages than FPGAs. Lastly, we highlighted its automotive segment growth which we expect could continue to be driven by the automotive ethernet growth supporting ADAS and infotainment applications. We revised our revenue projections upwards driven by growth in data center, carrier infrastructure and automotive but still obtained limited upside as its EV/EBITDA is higher than most other chipmakers. Overall, we rate the company as a Hold with a target price of $63.10.



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