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Morningstar | Networking Opportunity Is Marvell’s Priority; Maintaining FVE $21

Marvell Technology’s shift away from storage to networking infrastructure is in full swing after Cavium’s addition to the business. However, despite the significant growth potential from data center development, enterprise refreshes, and ongoing 5G investments, we believe competition will limit Marvell’s top-line expansion. We are maintaining our fair value estimate of $21 per share and our no-moat rating. However, we have upgraded the firm’s moat trend to stable as management has positioned the company on a firmer competitive footing.

Marvell is a leading supplier of controller chips into the hard disk and solid-state drives as well as a designer of chips for the networking processor market. The firm holds intangible assets in both the controller business and in networking applications, but we do not think these have given Marvell a moat. First, despite Marvell reducing its dependence on a declining HDD market, HDD-related sales are still a large portion of total revenue. We further expect increased competition from SSD manufacturers developing their own controllers. In our view, networking competitors will remain strong and will curb Marvell’s ability to gain market share. In sum, we believe the firm is likely to generate excess returns for the next decade but this is largely a function of a rising connectivity tide raising all boats; however, we expect Marvell will struggle to get out of Broadcom and Intel’s wake.

The firm’s controllers provide input/output interface control between the storage device and the host system. We believe the firm faces greater competition in higher-growth SSD controller market than in the declining HDD space. In our view, the need for further production differentiation will drive increasing amounts of competition from Western Digital, Toshiba, and others. We posit the storage business faces headwinds, but Marvell has done well to mitigate these by focusing its storage portfolio on nearline HDDs and customized SSD controllers.

Marvell has also buttressed its networking chip business through the acquisition of competitor Cavium. This greatly expanded its reach into the infrastructure networking market and Marvell is now able to serve clients in a variety of functions and price points. However, we maintain that the firm faces stiff competition from semiconductor giants like Broadcom and minnows, such as Barefoot. We believe the purchase of Cavium supports our optimism in Marvell’s management, which was installed in 2016 after a series of strategic missteps, litigation, and accounting controversies by previous leadership. But we believe it has a tough task to carve out a sustainable niche.