Today, Marvell Technology, Inc. (MRVL) is having heavy, unusual call options volume (out-of-the-money calls) after reporting strong earnings results yesterday for its fiscal Q1 ending May 3. This highlights the value of the system-on-a-chip semiconductor designer and MRVL stock.
MRVL stock is at $75.08, up over 7% in morning trading. However, the stock is still well off its highs from earlier in the year. It could have significantly more upside, as will be seen in this article.
Marvell reported +63% revenue growth Y/Y, propelled by strong data center-related growth for its cloud and AI server products. Moreover, revenue rose to almost $1.9 billion, up by +4.27% from the prior quarter.
This led to very high free cash flow (FCF), despite higher capex spending.
For example, operating cash flow (OCF) was $332.9 million, up +2.6% over last year’s $324.5 million FCF. After deducting $118.8 million, FCF came in at $214.1 million.
That represents 11.2% of its $1.895 billion revenue for the quarter, a very strong FCF margin. On an adjusted FCF basis (including asset sales, etc.), FCF came in at $238.8 million, or 12.6% of sales.
That was 7.1% higher than last year’s $223 million adj. FCF. This was despite significantly higher capex spending this quarter (i.e., $119m vs. $91.5m last year, or +30%).
As a result, we can project higher FCF going forward.
For example, analysts project revenue this year of $8.25 billion (+43%) and $9.78 billion next year, using 37 analysts’ estimates. This implies a next 12-month (NTM) run rate of $9.015 billion.
As a result, we can project FCF using the company’s most recent higher FCF margin:
$9 billion x 12.6% FCF margin = $1.134 billion FCF
That is much higher than a simple 4x projection using the Q1 FCF. For example,
$238.8m Q1 FCF x 4 = $955.2 million FCF
$1,134m FCF / $955.2m = 1.187 = n+18.7%
Therefore, MRVL stock could end up with an 18.7% higher market value over the next 12 months.
Let’s test that. For example, right now, MRVL has a market cap of $64.55 billion. That represents 67.6x the run rate projection of $955m. Another way to say this is that the stock has a 1.50% FCF yield (i.e., the reciprocal of 67.6x).
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