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Morningstar | Timeline for Marvell’s Recovery Is Uncertain but Secular Tailwinds Remain: Maintaining $21 FVE

Marvell reported mixed fourth-quarter fiscal 2019 results and guidance for the upcoming quarter that was weaker than we anticipated. While revenue was at the high-end of guidance (after management released an updated outlook in February), adjusted earnings per share came in below our estimate. Macroeconomic uncertainty and storage market transitions were the headwinds for the quarter, as expected. We reiterate our high uncertainty rating and no-moat rating for the firm and, in our view, do not see a margin of safety at current prices after maintaining our fair value estimate of $21 per share. The firm continues to negotiate a difficult environment for its storage controllers while networking demand was also curbed by global uncertainty. Despite near-term headwinds on both fronts, in our view, long-term data proliferation will require the transmission and storage solutions that Marvell can provide.

Revenue in the fourth quarter declined sequentially by 12.5% to $745 million. Storage was the primary culprit as it declined by 22% sequentially and 2% on a year-over-year basis despite the added contribution of Cavium’s fiber channel sales in the latter comparison. Both HDD and SSD controllers were impacted between inventory digestion on the part of cloud customers and an acceleration in SSD penetration in the notebook market. Networking sales declined by nearly 3% sequentially to $387.5 million due to macro uncertainty. Embedded processors were the one bright spot in the networking portfolio, with solid demand for the processors to support wireless base stations. While 5G related products are expected to ramp near the end of the fiscal year, the firm is adamant that it has plenty of opportunities and reiterated its long-term revenue targets of 6%-8% compound annual growth. Finally, while not yet material to revenue, we are pleased to see further traction for the firm’s ThunderX ARM-based server processors.

Management believes the first quarter of fiscal 2020 will be the bottom of the current turmoil with revenue expected to total $650 million at the midpoint of guidance. Sequentially, this would represent a nearly 13% decline with expectation for network sales decreasing by 10% and storage declining in the midteens. We reiterate our belief that the current storage weakness is temporary and that demand for the firm’s controllers, preamps, and fiber channel products will begin to recover in the back half of the calendar year. We appreciate management’s description of the efforts they are making to control for costs and drive synergies in the quarter and throughout the upcoming year and believe the implied targets for adjusted gross margin and operating margin (64% and 18%, respectively) are achievable.