Marvell Technology, Inc. (NASDAQ:MRVL) has experienced significant volatility in the stock market. Over the past three years, the stock price has fluctuated widely, ranging from $36 to $89. It recently plunged nearly 11.40% following the release of lower-than-expected first-quarter guidance. Despite this recent decline, I believe Marvel is still significantly overvalued.

Sales increase, but operating income fluctuates

Marvell, a leading provider of semiconductor solutions for data infrastructure, serves five major end markets: data center, enterprise networking, carrier infrastructure, consumer, and automotive/industrial. The data center market is the company's largest source of revenue, accounting for $2.4 billion or 41% of total revenue in fiscal 2023. Enterprise networking ranks second, accounting for 23% of total sales. Carrier infrastructure and consumer markets accounted for his 18% and his 12% of total annual revenue. The company is at customer concentration risk, with its top 10 customers generating 63% of its revenue. Remarkably, his single distributor alone accounted for 20% of his total sales in 2023.

From 2008 to 2021, Marvell Technology's revenue varied between $2.3 billion and $3.64 billion. In his next two years, sales soared to $5.92 billion in 2023 due to increased product sales, price increases, and the acquisition of high-speed semiconductor specialist Inphi. Despite this rapid increase, it decreased by 7.60% to $5.5 billion in 2024. In 2024, only the data center market grew by 54%, while the other four markets faced double-digit declines.

Marvell's operating profits have also fluctuated significantly, going from a loss of $315 million to a profit of $901.2 million from 2018 to 2023. In 2024, it posted a loss of $567.7 million. The loss in 2024 was due to lower sales, increased research and development costs, and higher restructuring-related costs.

Marvell Technology: Overvalued with high goodwill and intangible assetsMarvell Technology: Overvalued with high goodwill and intangible assets

Marvell Technology: Overvalued with high goodwill and intangible assets

Generate consistent cash flow

Despite volatile operating profits, Marvell has consistently generated positive operating cash flow and free cash flow in 15 of the past 16 years. The only exception was in 2017, when the company generated negative operating cash flow and free cash flow, primarily due to a $736 million lawsuit settlement with Carnegie Mellon University. This settlement related to read channel integrated circuit devices and hard drives incorporating such devices.

Marvell Technology: Overvalued with high goodwill and intangible assetsMarvell Technology: Overvalued with high goodwill and intangible assets

Marvell Technology: Overvalued with high goodwill and intangible assets

The discrepancy between operating income and operating cash flows can be attributed to significant depreciation and amortization expense, amortization of acquired intangible assets, and non-cash stock-based compensation to employees. In 2024, Marvell reports operating cash flow of $1.37 billion, free cash flow of $1.1 billion, and non-cash stock-based compensation of nearly $610 million. The total number of outstanding shares increased due to significant stock-based compensation. Since 2008, the total number of shares has increased by 46.50% from 590.3 million shares to 864.5 million shares.

High but manageable leverage

Many investors may be concerned about Marvell's high leverage levels. As of February, Marvell reported stockholders' equity of $14.83 billion, including $950.8 million in cash and cash equivalents. Interest-bearing debt amounted to $4.17 billion. Over his next five years, annual principal debt payments range from $131.2 million to nearly $960 million. With operating cash flow of $1.37 billion and a solid cash position, the company is well-positioned to easily repay its debt.

Marvell Technology: Overvalued with high goodwill and intangible assetsMarvell Technology: Overvalued with high goodwill and intangible assets

Marvell Technology: Overvalued with high goodwill and intangible assets

Source: Marvell's 10-K

In terms of assets, the majority of the company's assets consist of goodwill amounting to $11.59 billion and acquired intangible assets worth $4 billion. Goodwill represents the amount paid in excess of net asset value in an acquisition, and intangible assets include patents, brands, trademarks, and copyrights. Having significant amounts of goodwill and intangible assets creates the risk of potential write-downs and impairments if the acquired company's performance or the value of the intangible assets are less than expected. Such financial adjustments could significantly reduce reported revenues and negatively impact the Company's stock price.

grossly overrated

By 2026, Marvel is expected to generate approximately $7 billion in revenue. Assuming an EBITDA margin of approximately 25%, similar to the 2023 margin, Marvell's EBITDA is estimated at $1.75 billion.

Over the past decade, Marvell's Ebitda multiple has shown significant fluctuations, from a low of -16.30 to a high of 123.15. The average multiple over the past 10 years is 27x, which is slightly higher than the company's current Ebitda multiple of 24.13x.

Marvell Technology: Overvalued with high goodwill and intangible assetsMarvell Technology: Overvalued with high goodwill and intangible assets

Marvell Technology: Overvalued with high goodwill and intangible assets

Applying a 10-year average Ebitda multiple of 27, Marvell's enterprise value is estimated at $47.25 billion. Adjusting for net debt of $3.22 billion, the equity value is calculated at $44 billion. Assuming that the total number of shares increases by 20% due to stock-based compensation, the number of outstanding shares will increase to 1.04 billion shares. Therefore, Marvell's intrinsic value per share is estimated at $42.30, which is only 56% of its current trading price.

conclusion

Despite Marvell's strong position within the semiconductor industry and stable cash flow generation, recent sales declines combined with high levels of goodwill and intangible assets have led to volatility in operating income for investors. Indicates a potential risk. Although valuable, these assets are subject to impairment threats that can materially impact financial results. Additionally, Marvell's current stock price appears to be significantly overvalued, according to my estimation. As a result, investors must wait for better prices before initiating long positions.

This article first appeared on GuruFocus.



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