The semiconductor industry is feeling some whiplash these days.

The sector hit new highs last year thanks to the ongoing demand for its tiny chips…

Yet the tech sector’s rough start to 2022 has dragged many semiconductor stocks down.

In this week’s episode of Stock of the Week, I take a look at a leading chipmaker that’s feeling the pain.

It’s had a few big years – nearly doubling in both 2020 and 2021. But it’s off to a shaky start this year.

Will the bad news continue… or do its numbers paint a better picture?

The answers are in this week’s video. Click on the image below to watch it.

Transcript

Hi everyone, and welcome to another Stock of the Week.

Now, I’ve been doing your stocks of the week, the ones that you’ve been sending me in for the last couple of weeks. This is the last one I’m going to do for a few more weeks, and next week I’ll do one of my own. So this is still one of yours, just because I want to mix it up, and then next week I’ll do one of my own stocks of the week. I do like doing your ones, because it gives me an insight into what’s concerning you. And usually if one person sends it in, then 100 others or even 1,000 others have got the same questions. Okay.

So today’s Stock of the Week, or this week’s Stock of the Week is Marvell Technology (MRVL). It came in from one of my wonderful readers. So thank you very much for that.

As you know, I’m Alpesh Patel, I’m the person behind the GVI research. So let me apply this same research in summary to Marvell Technology. Obviously, if you’re a full-blown subscriber to my research, then you get my analysis in a heck of a lot of depth, and you also get the ones which I absolutely like.

So what’s my views with Marvell?

Now, Marvell sounds great because it’s a leading fab-less chipmaker focused on networking and storage applications. Sounds great. Sounds complicated. And from that, I take the word chipmaker. It serves data centers, carriers, enterprise, automatic, consumer, and lots of other markets. So basically we’re talking about chipmaking, we’re talking right across a lot of different sectors and segments. And that’s important because we know there’s huge demand for chips to the extent that that demand cannot be met.

This is a company which is already in that space. It’s also involved in solid-state drives, the kind of the drives that I’ve got in my PC as well. So somewhat diversified, got operations in the U.S., China, Malaysia, Philippines, Thailand, Singapore, India, Israel, Japan, South Korea, Taiwan, Vietnam. So we’re not talking just tied to one economy, and that’s important as well. It’s headquartered in Delaware, as so many companies are.

So let’s just look at the financials. And I guess the reason you’ve sent this in to me to have a look is because in 2017 it had a great run. 2017 it was up 52%. 2019 it was up 64%. 2020 it was up 79%. 2021 it was up 84%. But so far this year it’s down 22%, similar to the losses it had in the whole of 2018.

So you’re worried. You’re like, “Hey Alpesh, I’ve be doing so well on this every single year. Please God, let it come back.”

And the problem is, of course, those levels of growth are not sustainable.

So what’s going on? Is it something which you should just say, “Hey listen, the good times are over. Let’s get the hell out.” Or is it when you say, “Hey, you know what? Okay. The markets are taking profits at the moment. Let’s get out of this for now, or let’s just stay in for the long term.”

All right. So let’s have a look at this.

And overall on my valuation/growth/income/cash flow rating, it’s only got a 5. Remember I need a 7, 8 or 9, and that’s an algorithm based on the profitability of the company, revenue growth of the company, dividend deals. Five’s not bad, but it’s below my minimum threshold. Cash return on capital invested, so the amount of cash they’re throwing out for the capital that they’re investing, it’s about the efficiency of a company. It’s about the resilience of a company. The more cash it can throw out without having to invest lots and lots of capital, the better. 6.9%, at least it’s positive. But it’s not in the top 25%, or even the top 10% of companies, which is what I’d really like to see. Because we know from research, and I mentioned this before, research out of Deutsche Bank and Goldman Sachs, that those companies tend to generate over the longer term, 30% per annum returns.

So this company’s cash return on capital invested is clearly dropped back somewhat, and that might have happened in recent years. It might have been great in 2017, 2019, 2020 with those figures, but at the moment it’s dropped back and it might be, because competition’s caught up or whatever, they’ve had to invest a lot of capital and they’re just not generating the kind of cash that you’d want a company to be generating in order to be a high growth company.

So, how have we done over the last six months? Well actually, even though year to date we’re down 22%, over the last six months you’re still up 13%, which gives you an idea of just how strong the company’s been growing. And Sortino, its rewards for the amount of volatility above one, which is rather good. And that’s just a reflection of the fact that historically it’s just been doing incredibly well, and it’s been outperforming the market. Now it’s alpha for a very long period of time as well. And it’s got below to 20% volatility, so it’s not actually the most volatile either. So all of those things are good.

The one thing that concerns me is I’ve drawn this picture since those halcyon days, those great days over the last five years, and you can see how it’s grown. I’ve drawn a trend line, the average price along which the price has tended to move up or below by two standard deviations. If you remember your maths from school, you’ll know what a standard deviation is. So it tends to move up above its mean. And the issue at the moment is, even though it’s come off, it’s coming back to where its average is. Now hopefully it’ll continue going along that mean.

However, companies can, as you can see historically on this, and it’s to give you some perspective, for instance, what happened in 2019, they can move to their lower band, two standard deviations below their average. And that means a lot of downside is potentially there. I’m not saying it’s guaranteed to happen, but I’m saying it would not be unusual. It would not be outside the realms of possibility.

And you can see that had happened in 2018 as well. It moved from its upper standard deviation, or its mean, to its lower. That wasn’t unusual, and then it continued alongside. So that’s your perspective.

Do you hold on for the longer term?

I look at more of the fundamentals. Cash return on capital investor has said 6.9%. Too many reds here. I don’t like the return on equity numbers being red. I don’t like the free cash flow conversion being so red either. So there’s a cash flow issue here. They’re spending a lot of money, not quite getting it as well. So quite a few things. And forecast price earnings is a little bit expensive. Having said that, it’s supposed to be a good high growth company. Turnover is a bit flat, so that’s not phenomenal, is it? Operating cash flow is a bit flat. So there’s a lot of things here that aren’t quite moving all in the same direction for me. It’s not negative. It’s not out and out, oh my God, what are you thinking? What a speculative play. But there are better companies out there in my view. That’s the downside of it.

Okay. So hopefully that gives you something of a perspective. Obviously in my GVI research service, when I go into companies I’m going into a heck of a lot more depth than I’ve gone here. And we do all that background research for you, and we find the best of the best based on all of these factors. So we find companies where I’m really comfortable with them. So even if they were to fall, because there’s no guarantees everything will always go up, then I’m still confident that I like them based on their numbers. And here, if I’ve only got 15 stocks in my portfolio, for argument’s sake, there’s others which I could have which would give me more comfort than this one right now. It’s not to say it won’t go up. It’s not to say that. It’s just to say there’s better players in the team if we were to use, I don’t know, a Super Bowl analogy.

Okay. Thank you very much, all of you. Really appreciate it. Thank you.

 

 

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