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Morningstar | Long-Term Outlook Looks Bright for Marvell Though Shares Fairly Valued; Raising FVE to $21

On Oct. 16, 2018, Marvell management hosted an analyst day in which it provided further details on the growth initiatives and long-term prospects of the recently acquired Cavium and core Marvell businesses. After incorporating the extended outlook, we are increasing our fair value estimate to $21 from $18.50 though we will maintain our no-moat and negative trend rating. Shares are trading at a discount to our updated fair value estimate, but we would suggest waiting for a wider margin of safety.

Within storage, Marvell supplies controllers used in both HDD and SSD products, and management expects low-single digit growth for the long term, in line with our existing forecast. We believe the secular decline of HDDs generally (except in the case of nearline storage, which will grow in high-teens to low-20s) will be largely offset by the increase in the data center controller market for SSDs. We note that flash controllers have a long design and product cycle, making them less sensitive to the short-term supply and demand. That said, especially as the shift to SSDs accelerates, we would note that many NAND manufactures already develop internal controllers and could eventually substitute Marvell’s products for their own.

The growth potential of the networking business is what accounts for management’s long-term optimism. Management projects networking, which currently accounts for roughly 30% of sales, to grow in the low-teens as 5G adoption increases and there are further opportunities within cloud upgrades and build-outs. However, while management’s long-term model does not incorporate the possibility of share gains within networking, we believe the competition of future design wins will be fierce with the distinct possibility of narrow-moat Broadcom dampening Marvell’s growth potential in this market.

Management believes the capabilities brought from Cavium have expanded the combined market opportunity by $10 billion to a total of $18 billion and now expect total revenue to grow between 6%-8% on an annualized basis. We believe competition from well-capitalized players in networking and the transition underway in storage could limit growth toward the lower end of revenue guidance. However, the margin outlook of adjusted gross margins exceeding 66% by fiscal 2022 and adjusted operating margin increasing to 35% by the same period are roughly in line with our existing model.