Investing Club: Semiconductor stock Marvell is worth the wait, given strong results and guidance

Published Thu, Mar 3 20228:23 PM ESTUpdated Thu, Mar 3 20228:30 PM EST

Marvell Technology (MRVL) reported better-than-expected results in its fiscal fourth-quarter 2022 release after the closing bell Thursday. Record revenue of $1.343 billion, up 68% year over year, outpaced expectations of $1.32 billion while adjusted per-share earnings of $0.50, beat the $0.48-per-share consensus. Additionally, adjusted gross margin of 65.3% came in above the 65% the Street was looking for. Bottom line All in, it was a very solid quarter from Marvell Technology that was met with equally strong guidance. The data infrastructure semiconductor solutions provider realized revenue growth across all end markets with cloud, 5G and automotive now accounting for over 40% of total sales. The Enterprise Networking end market is proving to be another growth driver as companies look to upgrade their infrastructure to support the demands of a hybrid work world. The team closed out the year with record bookings momentum and sees opportunities for accelerated growth ahead as demand continues to outpace supply. While shares may be down more than 25% year to date, the business is stronger than ever and continues to grow at a rapid clip. Shares trade at an above market multiple of just under 30x forward earnings. However, the valuation screens favorably considering exposure to fast growing secular end markets and versus peers on a growth adjusted basis — calculated by taking price-to-earnings divided by the growth rate, what's referred to as the PEG ratio. That said, we must acknowledge the market we are in and weigh this against our bullish view of the company itself. Shares traded down on the release despite the strong print and while they did recover a bit as the call got underway, the knee jerk reaction speaks to a market that for the most part simply does not care — rightly or wrongly — for stocks trading at above market multiples. This puts us in something on the bind: On the one hand, our focus on the bottom-up fundamentals give us plenty of reason to be bullish; but from a top down view, against a backdrop characterized by spiking inflation, rising rates, and geopolitical turmoil, we must acknowledge that shares could remain under pressure for some time and certainly get even cheaper than they are now. It's worth noting that a significant source of neon gas, used in the production of semiconductors comes from Ukraine, which has been under attack from Russia for more than a week now. Therefore, rather than add to our position just so that we can take an even greater beating than we already have this year, we will wait for the indiscriminate sellers to dry up before stepping in. We've identified Marvell as a target to which we can allocate capital, now we must simply be patient, let shares come to use and pick our spot to pull the trigger. Guidance In addition to the solid headline print, guidance also came in above expectations. For the first quarter of fiscal 2023, management forecasts revenue of $1.425 billion, plus or minus 3%, a very strong guide versus the $1.382 the Street was expecting. Adjusted earnings guidance was also solid at $0.51 per share, plus or minus $0.03, compared to a $0.49 per share estimate. The adjusted gross margin guide between 65% to 66% was also better that the 65.1% consensus, at the midpoint. Making up this guidance, management commented on the call that they expect: Data Center sales to advance mid-single digits on a percentage basis sequentially and more than double versus the year ago period, with "performance led by cloud customers across a broad range of products." Carrier Infrastructure is expected to grow low-single digits sequentially and be up over 40% annually. Enterprise Networking revenue growth is expected to accelerate and notch mid-teens sequential growth while being up over 70% year over year. Automotive/Industrial revenues are expected to increase high-single digits sequentially and be up over 80% versus the same time last year. Consumer revenue is expected to be largely flat sequentially, though up double digits versus a year ago. End market Q4 Sales Data Center sales came in at $574.11 million, up +113% year over year,, with the majority of the growth coming from the cloud, driven by demand from hyperscale customers — though on premises offerings also saw both sequential and annual growth. On the call, management noted that they are well on their way to achieving the $400 million in incremental revenue contributions by fiscal 2024 and $800 million by 2025 targets laid out at Marvell's investor day. The team added that they have already realized incremental wins since then. So, management is on their way to not only realizing these targets, but very possibly exceeding them. One reason for this strength is that Marvell is already engaging with customer on its future 3-nanometer chip designs. While not yet available, they believe this engagement is driving wins on the current 5-nanometer offerings. The thinking is, customers want a supplier they can grow and advance with. In the case of Marvell, they can get what they need now, and collaborate on what they will need in the future. Carrier Infrastructure sales of $241.05 million, up 45% year over year, were driven by Marvell's 5G business, which was up 30% sequentially. The broader rollout of 5G technology and product ramps for base station customers is playing right into Marvell's hands. Enterprise Networking sales came in at $262.95 million, up 64% year over year, with management saying "this end market is going through an inflection," and calling out that "hybrid work is here to say." According to management, while remote work may be here to stay, the current network infrastructure was not built to handle this setup, characterized by not only a need to connect from anywhere but also transmit data at high speeds due to the need for video conferencing. As a result, companies are looking to upgrade their infrastructure and require new digital capabilities, massive increases to bandwidth, beefed-up cybersecurity and redundancy — a back up when your primary communication software goes down. Automotive/Industrial sales of $79.47 million, up 134% year over year, were driven by increased adoption, from multiple OEMs, or original equipment manufacturers, of Marvell's Britghtlane ethernet solutions. Basically, OEMs are relying on Marvell to help them make cars that are more connected with less latency to process data faster. Brightlane does just that by providing an "Ethernet backbone that connects all domain electronic control units (ECUs) as well as cameras and sensors to central compute devices in the vehicle," according to the press release announcing the capability in December 2021. Consumer sales of $185.40 million, up 11% year over year, were driven by sales of Marvell's solid-state drive controllers, which are found in consumer-oriented platforms such as gaming consoles. (Jim Cramer's Charitable Trust is long MRVL. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. 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Matt Murphy, president and CEO of Marvell Technology

Adam Jeffery | CNBC