Wall Street: Marvell reaches a crossroads six months after acquiring Innovium

Recently, Wall Street analysts analyzed Marvell's acquisition of Innovium and determined that it will add $150 million in incremental annual revenue to its data center division by fiscal 2023.

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In addition, the analyst identified the cost advantage of ASICs compared to FPGAs, as well as the incremental cost of higher power consumption associated with FPGAs, and Marvell's performance advantage in DPUs. The analyst expects this to translate into higher revenue growth for both products in the carrier infrastructure segment. Finally, the analyst expects growth in its automotive segment to be driven by the rise of automotive Ethernet connectivity and its customer base of some of the largest automakers and automaker suppliers.

Innovium acquisition builds on data center portfolio and incremental revenue growth

Marvell completed its acquisition of Innovium in October 2021 for $1.1 billion in stock. Innovium makes switch ASICs for Ethernet in data centers. The company competes with Broadcom, which dominates the data center switch ASIC market with a 70% share, while Innovium has a 29% share. Therefore, by acquiring Innovium, Marvell is competing with Broadcom in the switch ASIC market.

According to the company's management, the deal is expected to contribute to revenue in the next fiscal year and serve cloud customers.

Additionally, Marvell plans to integrate Innovium and Inphi products to deepen its customer relationships with cloud computing customers.

With the addition of the Innovium switch ASIC products, the company builds on its data center portfolio with DSP chipsets, DCI modules, OCTEON DPUs, custom ARM server CPUs and ASICs, and flash and HDD storage controllers.

As a result, analysts predict that the cloud market will grow by an average of 23% by 2025, driven by the rise of technologies such as 5G, AI and the Internet of Things and the growth of data volumes. In addition, based on the share of capital expenditures of the top cloud providers as a share of cloud market revenue, analysts expect the growth rate of cloud capital expenditures to average 21.9% by 2025.

Overall, analysts expect the acquisition of Innovium to complement its data center product portfolio, serve its cloud customers, and benefit the company by increasing revenue by $150 million. Analysts expect the deal to build on its data center product integration, as highlighted by the management of product integration with existing products, and analysts predict its growth based on previous analysis of the cloud market forecast, expecting the increase in data volume to benefit the company.

5G will drive growth in operators’ infrastructure sector

Rajeev Jayaraman, a semiconductor industry expert, said that although FPGAs offer advantages such as shorter time to market, more flexible and simpler design, ASICs can be mass-produced at a lower cost. In addition, ASICs are more energy-efficient because they consume less power and provide the same performance as FPGAs. As shown in the figure below, as the quantity increases, the cost rises, and the expected cost curve of FPGAs is steeper than that of ASICs.

Analysts believe that the forecast for incremental FPGA costs is correct based on Samsung's explanation that FPGAs are often used in early 5G deployments due to their programmability and flexibility. However, installing multiple FPGAs to process more data will lead to higher power consumption and cost challenges, and FPGAs require a trade-off between programmability and cost.

Marvell has entered into a partnership with Nokia to develop custom SoC products using its Arm processor technology. In addition, Marvell has launched its latest OCTEON 10 DPU based on TSMC's 5nm node, which has 3 times higher performance than previous OCTEON products while consuming only half the power. Management expects the company to benefit from increased OCTEON 10 shipments to Nokia for its 5G base stations in fiscal 2024.

In terms of the competition for DPUs, the analyst ranked Marvell as the DPU performance leader with Ethernet capabilities up to 400 Gbps and PCIe Gen 5. In comparison, products from Nvidia, Fungible, and Kalray support up to 200 Gbps and support PCIe Gen3/Gen4. However, in terms of each company's roadmap, the analyst ranked Nvidia as the leader, with its BlueField-4 to be released in 2024 and capable of 800 Gbps, followed by Marvell with its plans to develop 3nm chips.

Overall, due to the cost constraints of FPGAs, analysts expect the company to benefit from the shift to custom SoCs (such as Marvell's products) in early 5G infrastructure deployments, as shown by its Nokia customer example. In addition, analysts believe that its development of DPU SoCs for 5G can provide the company with more opportunities to benefit from the deployment of 5G networks.

Riding the automotive connectivity wave with major automotive customers

Marvell's automotive segment is the smallest of all its segments, accounting for only 3.97% of its FY21 revenue. However, it has the highest growth rate among all other segments, averaging 16.18% over the past 7 quarters, according to its Q2 and Q3 2022 quarterly earnings releases.

According to Yano Research, starting in 2016, the number of Ethernet nodes is expected to exceed 200 million by 2020, driven by growing applications in camera systems and infotainment. In addition, Strategy Analytics predicts that demand for automotive Ethernet ports will increase to 350 million by 2022.

As a testament to Marvell’s automotive Ethernet capabilities, NVIDIA, a global leader in ADAS technology, is using Marvell’s Ethernet solutions for its ADAS platform.

Additionally, analysts believe the company’s automotive Ethernet strength lies in its customer relationships with leading global automakers.

Supported by the growing demand for automotive Ethernet in ADAS and infotainment applications, Marvell's automotive segment is expected to grow to 350 million Ethernet ports by 2022, according to the Strategy Analytics Ethernet Forecast, which means a compound annual growth rate of 32.3% from 200 million Ethernet ports in 2020, which will decrease by 1% by 2025.

The growth of its automotive division is expected to be driven by the growing demand for Ethernet in automotive connectivity technology to support ADAS and infotainment application components. In addition, analysts also believe that its customer relationships with global automakers may benefit the growth of its automotive division, serving the top 10 automakers by sales.

Risk: Increasing competition from Broadcom and Nvidia

Broadcom dominates the market with 70% market share, while Innovium has 29%. This highlights the heating up of competition between Marvell and Broadcom in the data center. While Marvell has built up its product portfolio through acquisitions, it is still smaller than large competitors including Broadcom. In addition, Nvidia is expanding aggressively in the data center market. The company is developing its Bluefield DPU, and its roadmap will launch its Bluefield 4 DPU in 2024 with 100 TOPS and 800 Gbps Ethernet capabilities.

Overall, analysts believe that despite the company's expanded product portfolio, it still faces significant risks from larger competitors including Broadcom and Nvidia, especially in the data center and networking markets, where both Nvidia and Broadcom have larger revenues.

Valuation

Marvell's average FCF margin over the past five years was 6.48%. Marvell completed its acquisition of Cavium for $6.1 billion in fiscal 2019. Excluding the acquisition, the company had a positive FCF margin.

Due to acquisitions, Marvell's leverage ratio increased from $337 million in net cash in 2017 to $1.328 billion in net debt in 2021. Its EBITDA interest coverage ratio also decreased from 864.3 times in 2017 to 9.2 times in 2021.

The analysts forecast its revenues based on their revenues by end-market customer segments. For Data Center and Innovium revenues of $150 million, the analysts applied a forecast for capital expenditure growth in the cloud market based on previous analysis. The Carrier Infrastructure segment is based on a 1% annual growth forecast from IHS Markit of 22.6%. The Enterprise Networks segment is based on a 17.53% CAGR in the enterprise communications market through 2026 and a 4.9% CAGR in the consumer portion of the consumer electronics market through 2027. Finally, for the Automotive/Industrial segment, the analysts applied the derived growth forecast mentioned in the third point.

In this analysis, the analyst analyzes its acquisition of Innovium as well as its carrier infrastructure and automotive divisions. With the completion of the Innovium transaction, in addition to the $150 million in incremental revenue that management expects in fiscal 2023, the analyst also highlights the integration between its Inphi products and the expansion of its data center portfolio, and analysts expect its growth to be driven by the growth of data volume. In addition, the analyst analyzes its carrier infrastructure segment and believes that it will benefit from 5G network deployment because its ASIC and DPU chips have more cost advantages than FPGAs. Finally, the analyst highlights the growth of its automotive division, which the analyst expects to continue to be driven by the growth of automotive Ethernet supporting ADAS and infotainment applications. Driven by the growth of data centers, carrier infrastructure and automobiles, the analyst raised the revenue forecast, but the upside is still limited because its EV/EBITDA is higher than most other chip manufacturers.