In a soaring stock market, there is no shortage of companies making new highs. But stocks can surge for different reasons: some companies have been enjoying a rally simply because the overall market sentiment is bullish, while others actually have substantial growth prospects to back their rising share price.
I believe Marvell Technology Group Ltd. (NASDAQ:MRVL) belongs to the latter category.
Headquartered in Santa Clara, CA, Marvell Technology is a semiconductor company that offers a wide range of storage, network infrastructure, and wireless connectivity solutions. The company has been around for 25 years and its semiconductor solutions have been transforming the enterprise, cloud, automotive, industrial, and consumer markets.
Like with a lot of tech stocks, 2020 has been a good year for MRVL stock. While the company’s share price did slip during the market sell-off in March, it quickly bounced back and went on a journey to new heights. Over the past 12 months, Marvell stock has surged more than 80%.
As I said, this is a company with strong growth prospects. And 5G happens to be one of the main growth drivers. Notably, rather than making chips for 5G handsets, Marvell’s solutions focus primarily on the infrastructure side of the 5G rollout.
In the third quarter of Marvell’s fiscal year 2021, which ended October 31, 2020, the company achieved its fifth straight quarter of sequential 5G revenue growth. (Source: “Marvell Technology Group Ltd. (MRVL) CEO Matt Murphy on Q3 2021 Results – Earnings Call Transcript,” Seeking Alpha, December 3, 2020.)
“Our 5G customer base continues to expand and the second regional customer has selected Marvell’s industry leading OCTEON fusion-based NAND processors to power their new 5G base stations,” said the company’s president and chief executive officer, Matt Murphy, in the company’s latest earnings conference call. (Source: Ibid.)
“They plan to engage with Marvell on a variety of RAN architectures, including emerging ORAN initiatives, enabling them to flexibly address the needs of network operators regardless of the network topology being deployed.”
The growth in 5G helped drive up Marvell Technology’s total top line. In the third fiscal quarter, the company generated $750.1 million in net revenue, representing a 13.2% increase year-over-year. (Source: “Marvell Technology Group Ltd. Reports Third Quarter of Fiscal Year 2021 Financial Results,” Marvell Technology Group Ltd., December 3, 2020.)
Mind you, it’s not just the company’s sales that have been rising. The bottom-line performance was more impressive: Marvell Technology earned adjusted net income of $0.25 per share in the third fiscal quarter. This marked a 47% increase from the $0.17 per share it earned in the year-ago period.
And that could be just a start. For the fourth fiscal quarter of Marvell Technology Group Ltd.’s fiscal year 2021, management is projecting $785.0 million in revenue at the midpoint of their guidance range. That would be a solid improvement quarter-over-quarter and a substantial increase year-over-year.
In the same period, adjusted gross margin is expected to be around 64%, which would mark a 100-basis-point expansion from the previous quarter.
Most of all, management believes that the fourth fiscal quarter would be the sixth straight quarter in which the company delivers quarter-over-quarter growth in 5G revenue.
This should not come as a surprise. As I’ve said many times before, 5G rollout is a multi-year process. So, companies that are well positioned to capitalize on the increasing 5G adoption—such as Marvell Technology—will get to enjoy a multi-year tailwind.
In the long term, the 5G stock is targeting a compound annual growth rate (CAGR) of 10% to 15% in revenue, and a gross margin between 63% and 65%. (Source: “Investor Day 2020,” Marvell Technology Group Ltd., October 8, 2020.)
Now, compared to start-up tech companies, Marvell Technology’s projected growth rates may not seem like much. However, keep in mind that the company is an established one, and what it offers is not only growth potential, but also cash returns to investors.
You see, since the third quarter of Marvell Technology’s fiscal year 2017, it has returned a whopping $1.8 billion to shareholders in the form of dividends and buybacks.
The share repurchase program is temporarily suspended for now because of a pending acquisition, but going forward, the company is determined to return more than half of its free cash flow to investors—through approximately $160.0 million in annual dividends and $364.0 million in buybacks. (Source: Ibid.)
Marvell Technology Group Ltd. (NASDAQ:MRVL) Stock Chart
Chart courtesy of StockCharts.com
As the above chart shows, Marvell Technology stock is already traveling on a nice uptrend.
If Marvell Technology Group Ltd. can continue growing its business in the 5G era—which it likely will—higher highs could be within reach for MRVL stock.