Marvell Technology Stock Breaks Out After Game-Changing Move

ON Semiconductor StockMarvell Technology Makes Game-Changing Move

The technology sector may be on the crux of a merger and acquisitions spree as technology companies search to add growth in a competitive and rapidly changing marketplace where companies cannot afford to be stale and not grow.

Microsoft Corporation (NASDAQ:MSFT) acquired LinkedIn in a $25.0-billion deal to branch into the social integration space. And now Broadcom Ltd (NASDAQ:AVGO) is looking to swallow up QUALCOMM, Inc. (NASDAQ:QCOM) in a deal that will likely surpass $100.0 billion.

The former high-flying technology stars of the past are struggling to grow, hampered by old, slowing legacy businesses that are facing dire futures.

Marvell Technology Group Ltd. (NASDAQ:MRVL), faced with muted growth and slowing in its legacy storage business, needed a jolt. It delivered after launching a $6.0-billion takeover of Cavium Inc (NASDAQ:CAVM), which, in my view, could be a game changer that saves the company from a future full of uncertainty.

Why the Acquisition Will Boost MRVL Stock

The deal to add Cavium at a big premium was necessary, and there was no other option.

Marvell reported two straight years of declining revenues, from $3.6 billion in FY15 to $2.3 billion in FY17, representing a two-year decline of 36%.

The future for Marvell stock wasn’t looking that good either, with revenue set to grow a mere 3.1% in FY18 and 2.3% in FY19. (Source: “Marvell Technology Group Ltd. (MRVL),” Yahoo! Finance, last accessed November 24, 2017.)

With the proposed addition of Cavium, Marvell will no longer depend on its slowing legacy storage business, and instead move into the faster-growing segments of networking, cloud, and data centers.

A look at the underlying fundamentals of Cavium show why the deal was made. Cavium grew its revenues from $372.97 million in 2014 to $603.3 million in 2016.

The sales growth for Cavium is projected at a stellar 63.1% in 2017 and 12.4% in 2018, which will help Marvell generate revenue growth going forward. (Source: “Cavium, Inc. (CAVM),” Yahoo! Finance, last accessed November 24, 2017.)

Cavium is also hugely profitable, which means the acquisition will not be a drain on Marvell, but rather will be immediately accretive to earnings.

Analyst Take:

The MRVL stock chart shows the breakout from the long-term resistance at around $16.00.

Chart courtesy of StockCharts.com

Notice the bullish formation of a “cup and handle” pattern, which is a technical indication of higher prices down the road for MRVL stock.

Chart courtesy of StockCharts.com

I expect another base to be formed at around the current levels, prior to another bull leg higher toward the $30.00 level. The downside risk is the upside trade gap at $18.00–$20.00, but I doubt MRVL stock will become available at that price