Why Keybanc Is As Bullish As Ever On Marvell Technology

Marvell Technology Group Ltd. MRVL reported third quarter earnings Tuesday, with a top- and bottom-line beat and encouraging guidance for the fourth quarter.

The Analyst

KeyBanc Capital Markets' Michael McConnell maintains an Overweight rating on Marvell's stock with a price target boosted from $25 to $29.

The Thesis

Marvell's earnings report was highlighted by the following, McConnell said: 

• Improved strength in connectivity. 
• An in-line gross margin rate of 61.6 percent — despite an unfavorable product mix in the quarter. 
• Lower operating expenses. 
• A 946-basis point improvement in gross margin from a year ago to 28.4 percent, which is "within reach" of the company's 30-percent long-term guidance.

Marvell's fourth quarter guidance implies a re-acceleration of growth in networking and can be traced to new network platform production ramps in North America and China, McConnell said in a research report. (See McConnell's track record here.) 

The networking segment was guided up by a rate in the high single digits quarter-over-quarter, which implies the strongest sequential growth in six quarters.

NAND supply is expected to improve in early 2018, which will benefit Marvell's supply-constrained customers, and SSD controllers are expected to account for 30 percent of storage in the fourth quarter, the analyst said. This would be favorable for Marvell, as SSD controllers are a higher-margin product and reduce the company's exposure to the secularly declining HDD market.

Price Action

Shares of Marvell were trading higher by nearly 2 percent early Wednesday morning.

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