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Investing Club: Earnings Show This Chip Stock We Own Is a Data Center, 5G and Automotive Powerhouse

Scott Mlyn | CNBC

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Marvell Technology (MRVL), which we own in the Charitable Trust, reported blowout third quarter earnings after the closing bell Thursday.

Net revenue increased 61% year over year (YoY) to $1.211 billion, exceeding estimates of $1.149 billion, according to FactSet. Adjusted earnings per share grew 72% YoY to $0.43, beating the FactSet consensus of $0.38 and topping the high end of management's guidance range. In addition to the headline results, non-GAAP gross margins and operating margins were both records at 65.1% and 34.5%, respectively.

Breaking down the results:

  • By product group, Data Center revenue increased 15% quarter over quarter (QoQ) and 109% YoY to about $500 million thanks to robust demand from cloud customers and also a positive contribution from the on-premise data center business. Management called out specific product lines like 200- and 400-gig PAM4 electro-optics, data center interconnect ZR modules, SSD and HDD controllers, cloud-optimized SoCs and Ethernet switches as the contributors to the sequential revenue growth. CEO Matt Murphy said on the conference call that he expects this strong level of revenue growth to be sustained because the majority of their product lines are benefitting from the start of new product ramps.
  • Carrier Infrastructure revenue increased 9% QoQ and 27% YoY to $215 million. Driving growth in the quarter was the ramping of Marvell's 5G products at multiple customers. In addition, improved supply in their wired business helped drive sequential growth.
  • Enterprise Networking revenue increased 11% QoQ and 56% YoY to $247 million. This was a big positive surprise as management previously thought revenues would be down on a sequential basis. But Marvell was able to deliver and exceed their initial expectations thanks to an improved supply environment. Driving the revenue growth in the quarter was Marvell's Ethernet networking portfolio which has been gaining market share.
  • Consumer revenue increased 10% QoQ and 20% YoY to $183 million. Not much to add here other than that growth is being driven by their SSD controllers which are featured in video game consoles.
  • Auto/Industrial revenue increased 16% QoQ and 114% YoY to $67 million. Marvell said its auto business is now over a $140 million annualized revenue rate, ahead of prior expectations, due in part to the faster pace of adoption of their Ethernet solutions by auto OEMs who are prioritizing their latest models which are rich in semiconductor content. Outside of connective, management continues to believe the company's next multi-billion dollar market opportunity is in automotive compute.

Guidance:

If you thought the third quarter was strong, wait until you see guidance for the fourth quarter and beyond. The company expects net revenue to be $1.320 billion +/- 3% and that's better than the estimate of $1.208 billion. Adjusted gross margin is expected to be 65%, slightly better than estimates of 65.6%. And adjusted earnings per share is expected to come in at $0.48 +/- $.03 per share and that's much higher than estimates of $0.42 per share. 

By end market, data center is expected to have another big quarter, led by a strong performance by cloud customers across a wide range of products. Data center revenue is expected to more than double YoY with sequential growth in the double-digits on a percentage basis.

Metaverse angle?

Also, it's time to add Marvell Technology to the list of pick-and-shovel ways to play the metaverse. Going out further in time, management called out large-scale virtual environments (like Facebook's metaverse) as a phase of growth with "immense potential" as it will "significantly accelerate a number of key trends, which are already occurring in the cloud today, including the need to store huge amounts of data in a secure environment, connected by high-speed electro-optic links to custom compute engines" according to CEO Murphy.

Also, Murphy added that "the metaverse also has the potential to be a killer app for 5G, another area of strength for Marvell. Multiple cloud customers have already engaged with us as they start designing the architecture of their next generation of data infrastructure to enable a significantly richer set of virtual applications and experiences."

In carrier infrastructure, management expects a strong ramp of its 5G business of approximately 30% on a sequential basis. It also sounds like the 5G inflection points is here with Marvell expecting "significant additional growth" over the next few years as 5G adoption increases worldwide and content gains that have been won begin to ramp.  For the combined carrier infrastructure across wireless and wired end markets, revenues are expected to increase in the low-teens on a percentage basis sequentially with accelerating YoY revenue growth to over 40%.

Enterprise Networking revenue is expected to grow in the low to mid-single digits percent sequentially and approximately 60% YoY. Consumer revenue is expected to increase sequentially in the low single-digit percent and YoY in the double digits on a percentage basis. Auto/Industrial revenue is expected to grow by a double-digit percent on a sequential basis and above 100% YoY.

Anticipating another big year

Management also provided some incredibly bullish commentary for fiscal year 2023. The company said it expects demand to remain above the high end of its long-term target model as they continue to drive supply improvements. As a result, Marvell is anticipating another big year. Marvell said they expect revenue from the combined Marvell and Inphi business to grow 30% YoY in fiscal 2023 off a $4.4 billion base in fiscal 2022. In addition, management expects $150 million of revenue next year from the Innovium acquisition. After performing some quick math, we believe management just guided its fiscal year 2023 revenue to about $5.87 billion. This outlook trounces the consensus estimate of $5.209 billion. And by the way, operating expenditures are growing at a much slower rate than top line growth, implying strong leverage in the business model.

Bottom line:

This was a remarkable quarter from Marvell Technology. Under the leadership of Murphy, this company has transformed into a premier name in high-performance computing. Marvell Technology has been in the Charitable Trust for years as our favorite way to play the 5G cycle, but it has evolved into much more than that. Marvell is a data center, 5G, and automotive chip powerhouse.

In the absence of supply constraints, we see no reason why the good times won't continue here thanks to the company's significant exposure to secular growth markets and the designs cycles, which provide plenty of visibility into future revenues.

In reaction to the better than expected quarter and stronger than expected outlook, MRVL shares surged roughly 17% to what would be a brand new all-time high of about $83 in after-market trading at the time this was written.

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 (Jim Cramer's Charitable Trust is long MRVL.)

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