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Is Marvell Tech an Undervalued Play?

- By Shubham Jaipuria

One chip stock that has been on investors' radars is Marvell Technologies (MRVL), evident from the constant bullish ratings by analysts covering the stock. The company is involved in designing, developing and supplying mixed and digital signal integrated circuits for digital data storage and networking markets.

The Santa Clara, California-based semiconductor company is running north on the back of an upbeat investor day on Oct. 16. In the last three months, 15 analysts have rated the company a buy and are quite bullish on the chipmaker.

"In the last reported quarter we had in Q2, we reached 63.5% [gross margins], which was an all-time record for Marvell," CEO Matt Murphy said at the investor day. "And finally, we had committed to deliver 30% operating margins existing fiscal '20. And again in Q2, the last one we reported as a standalone company, we also exceeded 30% operating margins, which was about six quarters ahead of schedule."

Moreover, Marvell's recent $6 billion acquisition of Cavium in July has played in the company's favor. With Cavium in its portfolio, Marvell can expand its infrastructure product offering by trying to break into the server microprocessor market.

"We got very valuable technologies from Cavium, leadership now in processors, leadership in security, leadership in accelerators," Murphy said. "And so, they also brought a very strong presence in datacenter and carrier which we had been trying to build."

Analysts across Wall Street anticipate that Marvell with Cavium is well positioned to handle changing industry dynamics, as emerging technologies and increased flash use in data centers and PCs drive demand for Marvell's component business.

From a growth pipeline perspective, Marvell is betting big on the 5G space, and Murphy expects it to be one of the key growth drivers for the company while pegging the total serviceable available market (SAM) at $18 billion for the combined company. Also, the company anticipates huge gains from the AI market. As Raghib Hussain, executive vice president and chief strategy officer at Marvell and one of the founders of Cavium said, the company sees in AI a "multi-billion dollar market opportunity" and "a critical function in future Marvell products."

From a valuation standpoint, Marvell is currently trading at a forward price-earnings ratio of 11.14 compared with the industry median of 18.55. Its operating margin of 17.27% currently stands far above the industry median of 6.76%.

All in all, Marvell Technologies presents a bullish investment case at the moment, considering industry factors and the company's growth pipeline. In addition, Wall Street is expecting the company to generate revenues of approximately $845 million compared with $665 million in the third quarter, indicating strength in the order pipeline for the company in the near term.

Disclosure: I do not own any of the stocks mentioned.

This article first appeared on GuruFocus.