Infrastructure semiconductor solutions provider Marvell Technology Group Ltd. MRVL reported in-line fiscal third-quarter earnings but guided the fourth quarter lower. The company also announced securing of all necessary regulatory approvals for the proposed sale of its wireless connectivity portfolio to NXP Semiconductors NV NXPI, giving first half of December as the timeline for the closing of the transaction.
The Analysts
Morgan Stanley analyst Joseph Moore maintained an Equal-Weight rating on Marvell but increased the price target from $20 to $24. (See his track record here)
Reflecting on the wireless connectivity deal, Craig Hettenbach maintained an Overweight rating and $121 price target. (See his track record here)
Like Opportunities Before Marvel But Struggle With Valuation
Marvell's outlook is disappointing but its product pipeline in 5G is impressive, analyst Moore said in a note. The analyst said he was surprised by the fact that the company guided organic revenues 4-5% below consensus despite Samsung's 5G ramp starting a quarter earlier than expected.
The storage business grew less than expected and enterprise networking continued to be slow, Moore noted.
"The 5G opportunity continues to be a bright spot, with multiple large and somewhat open ended opportunities," the analyst wrote in the note.
Moore said he also likes the M&A profile, with Marvell having acquired two businesses and divesting one, which is expected to add to net revenue, net cash and operating margin, and bolster its strategic profile.
Morgan Stanley expects Marvell's quarterly revenues growing organically by 26% in the next 12 months, with an incremental 22% growth in the calendar year 2021 and 5G exceeding the company's initial targets.
Despite high expectations for recovery in the core business and growth in new businesses, the firm sees limited upside to share price.
"We like the opportunities in front of Marvell, but struggle with valuation," the firm concluded.
See Also: Goldman Sachs Shares Semiconductor Stock Picks For A Challenging 2019
NXP Poised to Outperform
The anticipated closing of NXP's acquisition of wireless connectivity assets from Marvell ahead of schedule is encouraging, Hettenbach said.
"While NXP is clearly paying a full price at ~6X sales, we think the business will ultimately prove more valuable under their ownership," the analyst said.
The analyst expects NXP to leverage its leadership position in autos, as connectivity adoption increases in cars. The company is also likely to benefit from its position as the second largest semiconductor company in the distribution channel as opposed to Marvell, which is more of a direct to OEM supplier, he added.
In addition to connectivity, Morgan Stanley expects increasing momentum for NXP in battery management system for electric vehicles and the adoption of ultra-wide band, driving above-average growth in 2020 relative to peers.
The firm also pointed to NXP's recently approved $2 billion stock buyback and the company's comments that it would resume buybacks after the Marvell connectivity deal closes.
The firm sees traction on new growth drivers and increasing cash returns to shareholders bolstering the case for multiple expansion in the stock.
Marvell And NXP Price Action
Marvell shares were down 3.12% to $24.38, while NXP shares were rallying 2.05% to $116.96.
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