Our latest Focus Stock is Marvell Technology Group (MRVL), which carries our highest investment recommendation of 5-STARS, or Strong Buy, explains analyst Angelo Zino in CFRA Research's flagship newsletter, The Outlook.
We upgraded shares to Strong Buy on July 8 to reflect the company's valuation, as shares trade around 16x our CY 23 view and as MRVL is the cheapest GARP-oriented semiconductor name (+25% long-term EPS growth rate) in our universe.
We view MRVL as being the least exposed to the consumer (less than 15% of sales in areas like PC/gaming) after smart acquisitions/asset sales in recent years, positioning it to benefit from secular prospects tied to key infrastructure plays (cloud, 5G, and autos).
We think its robust pipeline within the cloud space (incremental $400 million in FY 23 and $800 million in FY 24) positions MRVL to take considerable wallet share and grow through a potential down chip cycle. We expect the easing of supply constraints and the shift towards 5nm/3nm offerings to be tailwinds for MRVL.
MRVL serves five end markets: data center (44% of April quarter revenue), enterprise networking (20%), carrier infrastructure (18%), consumer (12%), and automotive/industrial (6%).
We believe that MRVL is the ultimate connectivity play within the chip space, with cloud continuing to be the source of its strength in the data center and biggest opportunity over the next three to five years.
MRVL did grow its data center business by 131% in the Apr-Q, led by a combination of record capital spending from the biggest cloud players along with the contribution from recent acquisitions. We also see a number of Marvell product cycles driving strong growth in cloud, led by electro-optics.
On the carrier infrastructure side (+50% growth in the Apr-Q), demand in the second half will benefit from the growth in 5G deployment combined with MRVL product ramps, led by multiple base station customers. In wired, MRVL is seeing strong demand for its 400-gig Coherent electro-optics portfolio driven by rapid adoption in the metro and long-haul carrier markets.
On the enterprise networking side (+64%), we see sales being propped by an easing of supply constraints and higher average selling prices. On the auto/industrial side (+94%), the adoption of ethernet technology in cars is continuing to increase as OEMs design in higher-speed solutions to address the increase in bandwidth, which is supporting significant content growth.
Our 12-month target price of $60 is based on a P/E of 20.3x our CY 23 EPS estimate, above peers but well below its three- and five-year forward historical averages of 35.6x and 27.8x.
Risks to our rating and target include slower-than-expected growth in core markets like data centers and carrier infrastructure, more pronounced supply constraints than we anticipate, and rising competition.
