Semiconductors company Marvell Technology stunned Wall Street today as it plummeted to $42.35, marking a -11.7% change compared to the S&P 500 and the Nasdaq indices, which logged -2.8% and -3.8% respectively. MRVL is -42.89% below its average analyst target price of $74.16, which implies there is more upside for the stock. As such, the average analyst rates it at buy. Over the last year, Marvell Technology has lagged behind the S&P 500 by -11.1%, moving -25.8%.
Marvell Technology does not release its trailing 12 month P/E ratio since its earnings per share of $-0.6 are negative over the last year. But we can calculate it ourselves, which gives us a trailing P/E ratio for MRVL of -70.5. Based on the company's positive earnings guidance of $2.8, the stock has a forward P/E ratio of 15.1.
The average trailing Price to Earnings (P/E) ratio of US-based technology companies is 26.5 as of third quarter of 2022. In contrast, the S&P 500 average is 15.97. The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead).
P/E ratios don't take into account the growth of earnings. This means that a company with a higher than average P/E ratio may still be undervalued if it has extremely high projected earnings growth. Conversely, a company with a low P/E ratio may not present a good value proposition if its projected earnings are stagnant.
When we divide Marvell Technology,'s P/E ratio by its projected 5 year earnings growth rate, we obtain its Price to Earnings Growth (PEG) ratio of 0.5. Since a PEG ratio of 1 or less may indicate that the company's valuation is proportionate to its growth potential, we see here that MRVL is actually fairly valued if we factor growth into the price to earnings calculus. One important caveat here is that PEG ratios are calculated on the basis of future earnings growth estimates, which may turn out to be wrong.
An analysis of the company's gross profit margins can help us understand its long term profitability and market position. Gross profits are the company's revenue minus the cost of goods only, and unlike earnings, don't take into account taxes and overhead. Here's an overview of Marvell Technology,'s gross profit margin trends:
- 2021 gross margins: 50.6%
- 2020 gross margins: 51.0%
- 2019 gross margins: 52.3%
- 2018 gross margins: 58.7%
- Average gross margin: 53.2%
- Average gross margin growth rate: -4.7%
- Coefficient of variability (lower numbers indicating more stability): 7.1%
We can see from the above that Marvell Technology,'s gross margins are very strong. Potential investors in the stock will want to determine what factors, if any, could derail this attractive growth story.
Marvell Technology's financial viability can also be assessed through a review of its free cash flow trends. Free cash flow refers to its operating cash flows minus its capital expenditures, which are expenses related to the maintenance of fixed assets such as land, infrastructure, and equipment. Over the last four years, the trends have been as follows:
- 2021 free cash flow: $650,044,000.00
- 2020 free cash flow: $710,489,000.00
- 2019 free cash flow: $278,376,000.00
- 2018 free cash flow: $520,823,000.00
- Average free cash flow: $650,044,000.00
- Average free cash flown growth rate: 33.4%
- Coefficient of variability (lower numbers indicating more stability): 35.5%
With its positive cash flow, the company can not only re-invest in its business, it can offer regular returns to its equity investors in the form of dividends. Over the last 12 months, investors in MRVL have received an annualized dividend yield of 0.5% on their capital.
Another valuation metric for analyzing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present liquidation value of the company, as if it sold all of its assets and paid off all debts. As of the third quarter of 2022, the average P/B ratio for technology companies is 5.57. In contrast, the average P/B ratio of the S&P 500 is 2.95. Marvell Technology's P/B ratio is 2.3, telling us that the market value of the company exceeds its book value by a factor of 2, but is still below the average P/B ratio of the Technology sector.
Since it has a negative P/E ratio, a lower P/B ratio than the sector average, a steady stream of strong cash flows with an upwards trend, Marvell Technology is likely fairly valued at today's prices. The company has mixed growth indicators because of a PEG ratio of less than 1 and consistently strong gross margins that are shrinking. We hope you enjoyed this basic overview of MRVL's fundamentals. Make sure to check the numbers for yourself, especially focusing on their trends over the last few years.
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