Marvell (MRVL) Q3 Earnings: What Lies Ahead for the Stock?
Zacks Equity Research
Updated
Marvell Technology Group Ltd. MRVL is set to report third-quarter fiscal 2018 earnings results on Nov 28. The company surpassed earnings estimates in the trailing four quarters, with an average beat of 25.9%.
We believe that the strong demand for Marvell’s 4G LTE products and acquisition synergies are likely to act as catalysts. Going forward, the company’s current restructuring initiative will help it to improve cloud infrastructure and applications, which is likely to drive the top line.
Let’s see how things are shaping up prior to this announcement.
Expect What?
The Zacks Consensus Estimate for the quarter is pegged at 32 cents, reflecting a year-over-year increase of 60%. Further, the earnings estimate has trended upward in the last 30 days. However, analysts polled by Zacks anticipate revenues of $612 million, up roughly 6.4% from the year-ago quarter.
Aspects to Influence Q3 Results
Q2 Earnings Highlight
Marvell reported stellar second-quarter fiscal 2018 results, wherein both the bottom and the top line surpassed the Zacks Consensus Estimate. Revenues improved on a year-over-year basis mainly owing to increased demand from its storage, networking and connectivity business. Moreover, the company provided encouraging third-quarter earnings guidance.
For the third quarter, the company anticipates non-GAAP earnings per share in the band of 30-34 cents (mid-point 32 cents) while the Zacks Consensus Estimate was pegged at 31 cents.
Notably, its shares has gained 73.7% year to date, outperforming the 60.3% rally of the industry it belongs to.
Acquisition: Key Catalyst
In an effort to expand its offerings beyond hard disk drives to high growth areas such as data centers and wireless communications, Marvell recently entered into an agreement to acquire Cavium. The buyout will provide the company an opportunity to expand its offerings and access newer markets.
Furthermore, Cavium’s strategy of breaking into Intel’s INTC lucrative hold on the server microprocessor market makes it the most feasible buyout for Marvell, per a Bloomberg report. According to the report, Intel holds over 99% market share in this space. In fact, Cavium got a major breakthrough in the server microprocessor market early this year when it announced that Microsoft Azure cloud platform will run on its ARM-based processors instead of Intel’s. Consequently, we believe that Cavium’s buyout will give Marvell direct access to this lucrative market. These factors are likely to positively impact the to-be-reported quarter.
SSD &Share Repurchase: Other Positive Factor
Marvell is a promising player in the solid state drive (“SSD”) controllers market. The storage market is seeing a steady increase in demand, given fast-growing data volume, especially exponential growth in unstructured data. NAND (non-volatile storage technology) demand is anticipated to remain very strong this year as well. SSD demand will also increase and could even surpass manufacturing capacity, leading to periodic shortage and higher pricing in the near term. Marvell is benefiting from growing demand for SSD products. This is evident from the company’s fiscal 2017 revenues from the storage end market, which accounted for 50% of total revenues. Moreover, in second-quarter fiscal 2018, revenues from storage made up 52% of total revenues. Storage revenues were positively impacted by strong demand from SSD customers and share gains in the HDD segment.
The Zacks Consensus Estimates for storage is pegged at $316 million.
Furthermore, Marvell regularly returns value to its shareholders. In 2017, the company repurchased roughly 13.3 million shares worth $183.1 million and returned $122.3 million as dividends. During the quarter (second-quarter), Marvell paid $30 million as dividend to its shareholders and repurchased $221 million worth of shares. We believe that share repurchases are a good way of returning cash to investors while boosting the company’s EPS as well.
Why a Likely Positive Surprise?
Our proven model shows that Marvellis likely to beat earnings because it has the right combination of two important ingredients.
Zacks ESP: Marvell’s Earnings ESP is +0.13%. A favorable ESP serves as a meaningful and leading indicator of a likely positive surprise. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Zacks Rank: Marvell currently carries a Zacks Rank #2 (Buy). Note that stocks with a Zacks Rank #1 (Strong Buy), 2 or 3 (Hold) have a significantly higher chance of beating earnings estimates. Conversely, Sell-rated stocks (Zacks Rank #4 or 5) should never be considered going into an earnings announcement.
The combination of Marvell’s Zacks Rank #2 and +0.13% ESP makes us reasonably optimistic of an earnings beat.
Other Stocks with Favorable Combination
Here are some companies you may want to consider as our model shows that these too have the right combination of elements to post an earnings beat:
Methode Electronics, Inc. MEI has an Earnings ESP of +4.21% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
Nutanix Inc. NTNX has an Earnings ESP of +1.42% and a Zacks Rank #3.
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