Advertisement
New Zealand markets closed
  • NZX 50

    12,325.60
    -3.84 (-0.03%)
     
  • NZD/USD

    0.6011
    -0.0039 (-0.64%)
     
  • NZD/EUR

    0.5519
    -0.0024 (-0.44%)
     
  • ALL ORDS

    8,209.20
    -63.50 (-0.77%)
     
  • ASX 200

    7,971.60
    -64.90 (-0.81%)
     
  • OIL

    80.25
    -2.57 (-3.10%)
     
  • GOLD

    2,402.80
    -53.60 (-2.18%)
     
  • NASDAQ

    19,522.62
    -182.47 (-0.93%)
     
  • FTSE

    8,155.72
    -49.17 (-0.60%)
     
  • Dow Jones

    40,287.53
    -377.49 (-0.93%)
     
  • DAX

    18,171.93
    -182.83 (-1.00%)
     
  • Hang Seng

    17,417.68
    -360.73 (-2.03%)
     
  • NIKKEI 225

    40,063.79
    -62.56 (-0.16%)
     
  • NZD/JPY

    94.6330
    -0.5090 (-0.53%)
     

Calculating The Intrinsic Value Of Marvell Technology, Inc. (NASDAQ:MRVL)

Key Insights

  • Marvell Technology's estimated fair value is US$71.63 based on 2 Stage Free Cash Flow to Equity

  • Current share price of US$67.99 suggests Marvell Technology is potentially trading close to its fair value

  • Our fair value estimate is 20% lower than Marvell Technology's analyst price target of US$89.41

Today we will run through one way of estimating the intrinsic value of Marvell Technology, Inc. (NASDAQ:MRVL) by projecting its future cash flows and then discounting them to today's value. We will use the Discounted Cash Flow (DCF) model on this occasion. Don't get put off by the jargon, the math behind it is actually quite straightforward.

We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

ADVERTISEMENT

See our latest analysis for Marvell Technology

The Model

We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. To begin with, we have to get estimates of the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.

A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we need to discount the sum of these future cash flows to arrive at a present value estimate:

10-year free cash flow (FCF) estimate

2024

2025

2026

2027

2028

2029

2030

2031

2032

2033

Levered FCF ($, Millions)

US$1.19b

US$1.11b

US$2.05b

US$2.90b

US$3.60b

US$4.27b

US$4.76b

US$5.18b

US$5.53b

US$5.84b

Growth Rate Estimate Source

Analyst x7

Analyst x9

Analyst x8

Analyst x5

Analyst x1

Analyst x1

Est @ 11.56%

Est @ 8.81%

Est @ 6.88%

Est @ 5.53%

Present Value ($, Millions) Discounted @ 8.7%

US$1.1k

US$942

US$1.6k

US$2.1k

US$2.4k

US$2.6k

US$2.7k

US$2.7k

US$2.6k

US$2.5k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$21b

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.4%. We discount the terminal cash flows to today's value at a cost of equity of 8.7%.

Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = US$5.8b× (1 + 2.4%) ÷ (8.7%– 2.4%) = US$94b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$94b÷ ( 1 + 8.7%)10= US$41b

The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is US$62b. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of US$68.0, the company appears about fair value at a 5.1% discount to where the stock price trades currently. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.

dcf
dcf

The Assumptions

Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. You don't have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at Marvell Technology as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we've used 8.7%, which is based on a levered beta of 1.378. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

SWOT Analysis for Marvell Technology

Strength

  • Debt is not viewed as a risk.

Weakness

  • Dividend is low compared to the top 25% of dividend payers in the Semiconductor market.

Opportunity

  • Forecast to reduce losses next year.

  • Has sufficient cash runway for more than 3 years based on current free cash flows.

  • Current share price is below our estimate of fair value.

Threat

  • No apparent threats visible for MRVL.

Next Steps:

Whilst important, the DCF calculation is only one of many factors that you need to assess for a company. DCF models are not the be-all and end-all of investment valuation. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For Marvell Technology, we've compiled three pertinent elements you should assess:

  1. Risks: For example, we've discovered 1 warning sign for Marvell Technology that you should be aware of before investing here.

  2. Management:Have insiders been ramping up their shares to take advantage of the market's sentiment for MRVL's future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.

  3. Other Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!

PS. Simply Wall St updates its DCF calculation for every American stock every day, so if you want to find the intrinsic value of any other stock just search here.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.