On Wednesday, the stock price of chipmaker Marvell Technology (MRVL) fell 4.93%. The stock decline came after a Wall Street analyst downgraded his recommendations on Marvell stock.
BMO Capital downgraded Marvell stock
On Wednesday, BMO Capital downgraded its rating on Marvell stock. According to TheFly, BMO Capital analyst Ambrish Srivastava slashed the rating on Marvell to “market perform” from “outperform.” However, Srivastava maintained his price target of $28 on Marvell stock.
According to CNBC, Srivastava noted, “With the shares within striking distance of our target price, and with the opportunity in communications well understood and discounted in the current share price, we find MRVL reasonably valued with a balanced risk/reward profile.”
However, if we consider other analysts’ opinions, we would have a different view on Marvell stock. Let’s see why other analysts are favoring MRVL stock and whether it could climb further.
Marvell’s Q3 earnings performance
On December 3, the company reported mixed earnings for the third quarter of fiscal 2020. While its earnings exceeded analysts’ estimates in the quarter ending in October, its revenues didn’t meet Wall Street expectations. The semiconductor stock lowered its earnings outlook for the upcoming quarter. However, the company predicted better-than-expected revenues for the fourth quarter of fiscal 2020.
Marvell’s adjusted earnings fell 48.5% year-over-year (or YoY) in Q3, due to lower top-line and margin contraction. In the third quarter, its gross margin contracted by 110 basis points, and its operating margin contracted by 890 basis points year-over-year.
The company’s revenues also dropped 22.2% YoY in Q3. The trading ban on its key customer, Huawei, partially disrupted its Q3 sales. Moreover, the company expects the trade ban on specific Chinese customers, including Huawei, to continue to hurt its Q4 results.
Despite the negative impact of the trade ban, Marvell showed improved revenues sequentially on the back of its networking business. The company’s storage business also improved from the preceding quarter. The company also expects improvement in fiscal 2021.
Marvell expects improvement ahead
We are very optimistic about Marvell’s investments in 5G technology. Marvell is on track to launch its first 5G products in the fourth quarter, with the initial deployments in Korea. The company expects expansion in 5G adoption to other geographies, including Japan and the US, by fiscal 2021.
Further, Marvell’s acquisition of Aquantia and Avera is expected to broaden its technology portfolio for infrastructure customers. The company’s divestiture of its wireless connectivity business to rival chipmaker NXP Semiconductor (NXPI) would also help boost its gross margins.
Currently, the company expects its non-GAAP gross margin to be 62% in the fourth quarter. Marvell expects its gross margin to exceed 63% after completing the sale of its Wi-Fi business and integration of Aquantia and Avera into its supply chain.
For the fourth quarter, which ends in January 2020, Marvell expects revenue of $750 million, plus or minus 3%, including the trade ban impact. Analysts expect its Q4 revenues to decline 1.6% YoY and for its fiscal 2020 revenues to fall 5.13% YoY. Nevertheless, analysts expect its revenues to improve in fiscal 2021.
The company also anticipates adjusted earnings per share of $0.15–$0.19 for Q4. However, analysts initially predicted EPS at the high end of the company’s guided range to $0.19. Wall Street analysts expect fiscal 2020 earnings to decline 43.6%. However, its earnings are expected to improve by 46.9% in fiscal 2021.
US-China trade deal might boost Marvell stock
The markets are picking up on the optimism surrounding the trade deal, as are chip stocks like Marvell. Chip stocks are highly sensitive to the trade war, as most of their revenues come from China. So, a trade deal could further boost sensitive chip stocks.
According to recent reports, the two countries are on track to make a trade deal. According to CNBC, China’s Ministry of Commerce spokesperson, Gao Feng, stated on Thursday, “If both sides reach a phase-one agreement, relevant tariffs must be lowered.” This statement followed the Bloomberg report stating that the US-China trade deal would happen despite tensions over Hong Kong and Xinjiang.
Investors are hoping for a trade deal to occur before December 15, which could cancel the planned tariff hike on Chinese goods. This 15% tariff hike would target an additional $156 billion in imported Chinese goods. The US-China trade truce should also improve the trade relations between the US and Huawei.
Marvell’s stock valuation
Marvell stock appears reasonably valued, considering enterprise value-to-revenue metric. MRVL stock has an EV-to-revenue ratio of 5.43x for fiscal 2021. Meanwhile, Wall Street analysts expect its fiscal 2021 revenues to grow 15.7% YoY.
Analysts’ recommendations on Marvell stock
Among the 26 analysts that cover Marvell Technology (MRVL) stock, 22 gave it “buy” ratings while four gave it “hold” ratings. None of the analysts recommended a “sell” for MRVL. Analysts expect a 12-month price target of $29.68 soon after its Q3 earnings. This shows that Marvell stock is trading at a discount of 19.4% to average analyst estimates.
Marvell stock closed the trading day at $23.92 on Wednesday. At this closing price, Marvell Technology’s market capitalization stood at $15.96 billion. On a year-to-date basis, Marvell stock gained about 48.2% on December 4.
After its earnings, several analysts raised their price targets on Marvell stock:
- Citigroup raised its price target to $30 from $29.
- Morgan Stanley raised its price target to $24 from $20.
- Susquehanna raised its price target to $30 from $28.
- Needham raised its price target to $29 from $28.
- Rosenblatt Securities raised its price target to $32 from $28.
- Jefferies raised its price target to $32 from $29.
- J.P. Morgan raised its price target to $31 from $27.
- Cowen & Co. raised its price target to $27 from $26.