Connectivity has been important during the pandemic. Two areas that are increasing connectivity are 5G and autonomous vehicles. Semiconductors are necessary for both of these technologies and today’s firm is one of the largest semiconductor firms.
Looking at as-reported numbers, it appears today’s firm generates declining and negative returns. Digging deeper into the numbers, we can see the firm has stronger profitability than the market thinks.
Also below, the company’s Uniform Accounting Performance and Valuation Tearsheet.
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As we have discussed before, one of the biggest trends during the pandemic has been the “At-Home Revolution.” With people spending time inside, this has meant companies like Fox Factory (FOXF) and Masonite International (DOOR) have benefited.
Another trend has been the rise of Tesla (TSLA) and the overall electric vehicle (EV) market. Tesla’s stock is up roughly 600% this year, thanks to the firm’s inclusion in the S&P 500 index and greater demand.
The rise of Tesla has also spiked interest in cars with self-driving capabilities.
One technology a self-driving car needs is powerful connectivity. The next wave of wireless communication had already been at the forefront of the technology sector thanks to the At-Home Revolution.
More remote work has meant connectivity is essential, both in terms of being to communicate with coworkers and collaborate on the cloud. Without a high speed connection, it’s difficult to successfully work from home. One technology helping to reduce wait times and increase connectivity is 5G.
Similarly, automated cars need significantly more computing power and connectivity than a normal car. Autonomous cars need to have the ability to synchronize internally with external data sources.
This is imperative because if connectivity becomes unreliable, people’s lives can be at stake. The cars need to be able to receive and transport reliable data in rain, snow, day, and night. Anything less than 100% reliability can put passengers at risk.
Marvell Technology (MRVL) has positioned itself in the autonomous car and 5G markets.
Marvell has invested the capital to make itself a leader in autonomous driving space. It has state-of-the-art collision avoidance and drift warning systems. The firm’s chips also enable automakers to use one switch to connect multiple features in one car.
Additionally, Marvell has positioned itself well in the 5G space. It creates the chips for top telecommunication vendors like Nokia and Samsung. Its chips have advanced technology that allows them to transfer data at lightning speeds.
Despite this market focus, the firm appears to be performing poorly according to as-reported metrics. Over the past five years, as-reported has stayed below corporate averages and reached a low of -1% this fiscal year.
However, Marvell isn’t suffering from performance issues but rather bad accounting. The as-reported metrics are distorted by inconsistencies present in GAAP accounting. Goodwill and special items, among other line items, are artificially suppressing the firm’s profitability.
Uniform Accounting shows how the firm’s ROA has been improving over the past five years. Once the veil has been lifted, Marvell’s investments in the autonomous car and 5G space have been driving profitability.
Due to these successful moves into these markets, Marvell’s Uniform ROA improved from 0% in 2016 to 16% this past year.
Uniform Accounting is able to show how successful Marvell’s strategy has been. It has positioned itself well in fast growing markets, and Uniform ROA confirms this.
Without Uniform Accounting, investors might view Marvell as another technology company unable to turn a profit, and miss the success the firm has seen focusing on two of Wall Street’s favorite trends.
SUMMARY and Marvell Technology Group Tearsheet
As the Uniform Accounting tearsheet for Marvell Technology (MRVL:USA) highlights, the Uniform P/E trades at 38.9x, which is above the global corporate average valuation levels and its historical average valuations.
High P/Es require high EPS growth to sustain them. In the case of Marvell Technology, the company has recently shown a 30% Uniform EPS growth.
Wall Street analysts provide stock and valuation recommendations that provide very poor guidance or insight in general. However, Wall Street analysts’ near-term earnings forecasts tend to have relevant information.
We take Wall Street forecasts for GAAP earnings and convert them to Uniform earnings forecasts. When we do this, Marvell Technology’s Wall Street analyst-driven forecast is a 51% EPS decline in 2021 followed by a robust 209% EPS growth in 2021.
Based on the current stock market valuations, we can use earnings growth valuation metrics to back into the required growth rate to justify Marvell Technology’s $43 stock price. These are often referred to as market embedded expectations.
In order to justify current stock prices, the company would need to have Uniform earnings grow 16% per year over the next three years. What Wall Street analysts expect for Marvell Technology’s earnings growth is below what the current stock market valuation requires in 2021 but above its requirement in 2022.
Furthermore, the company’s earning power is 3x the long-run corporate averages. Additionally, cash flows and cash on hand are slightly above its total obligations—including debt maturities, capex maintenance, and dividends. Together, this signals low credit and dividend risk.
To conclude, Marvell Technology’s Uniform earnings growth is well below peer averages, but the company is trading above peer average valuations.
Joel Litman & Rob Spivey
Chief Investment Strategist &
Director of Research
at Valens Research