Key Insights
Marvell Technology's expected fair value is $96.50 based on a two-step free cash flow to equity. The current share price of $68.82 indicates that Marvell Technology is potentially undervalued by 29%. Our fair value estimate is 6.9% higher than Marvell Technology's analyst target price of $90.30.
Today, I'm going to show you one way to estimate the intrinsic value of Marvell Technology, Inc. (NASDAQ:MRVL). You do this by discounting expected future cash flows to their present value. In this case, I'll use the Discounted Cash Flow (DCF) model. Believe it or not, it's not that hard as you'll see with an example.
We caution that there are many ways to value a company, and like a DCF, each method has advantages and disadvantages in certain scenarios. If you'd like to learn a bit more about intrinsic value, check out the Simply Wall St analysis model.
View our latest analysis for Marvell Technology
Calculation step by step
We use a two-stage growth model, which means we split a company's growth into two stages. In the first period, we assume that a company may have a higher growth rate, while in the second stage, it usually has a steady growth rate. First, we need to forecast cash flows for the next 10 years. We use analyst forecasts where possible, but if they're not available, we extrapolate previous free cash flow (FCF) from last forecasts or reported values. During this period, we assume that companies with shrinking free cash flows will slow their rate of shrinkage, and that companies with growing free cash flows will slow their growth rate. This is to reflect the fact that growth tends to be slower in the early stages than in the later stages.
Typically, a dollar today is assumed to be worth more than a dollar in the future, so we discount the value of these future cash flows to their estimated value in today's dollars.
10-Year Free Cash Flow (FCF) Estimates 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 Leveraged FCF ($ millions) $1.08 billion $2.07 billion $2.91 billion $3.32 billion $4.27 billion $4.96 billion $5.57 billion $6.08 billion $6.52 billion $6.90 billion Growth Rate Estimates Source Analyst x9 Analyst x7 Analyst x4 Analyst x2 Analyst x1 Estimate 16.33% Estimate 12.18% Estimate 9.28% Estimate 7.24% Estimate 5.82% Present Value (million dollars) Discount rate 8.2% $1,000 $1.8k $2.3k $2.4k $2.9k $3.1k $3.2k $3.3k $3.2k $3.2k
(“Estimate” = Simply Wall St's estimate of FCF growth rate)
Present Value of 10-year Cash Flows (PVCF) = US$26 billion
After calculating the present value of the future cash flows for the first 10 years, we need to calculate a terminal value that accounts for all future cash flows beyond the first stage. Using the Gordon Growth Formula, we calculate the terminal value with a future annual growth rate equal to 2.5%, the five-year average of the 10-year Treasury yield. We discount the terminal cash flows to today's value at a cost of equity of 8.2%.
Terminal Value (TV) = FCF2034 × (1 + g) ÷ (r – g) = US$6.9 billion × (1 + 2.5%) ÷ (8.2%– 2.5%) = US$125 billion
Present Value of Terminal Value (PVTV) = TV / (1 + r)10 = US$125 billion ÷ (1 + 8.2%)10 = US$57 billion
The total value, or equity value, is the sum of the present value of the future cash flows, which in this case is $84 billion. The final step is to divide the equity value by the number of shares outstanding. Compared to the current share price of $68.8, the company appears to be a bit undervalued, at a 29% discount to the current share price. Assumptions in the calculation have a big impact on the valuation, so it's best to view this as a rough estimate rather than accurate to the last cent.
NasdaqGS:MRVL Discounted Cash Flow August 27, 2024
Important Assumptions
The most important inputs for discounted cash flows are the discount rate and, of course, the actual cash flows. Part of investing is making your own assessment of the future performance of a company. Try the calculations yourself and check your assumptions. DCF does not give you a complete picture of a company's potential performance as it does not take into account the cyclicality of the industry or the company's future capital requirements. Since we are looking at Marvell Technology as a potential shareholder, the cost of equity capital is used as the discount rate, not the cost of capital (or weighted average cost of capital, WACC) that takes into account debt. In this calculation, we used 8.2% based on a leverage beta of 1.371. Beta is a measure of a stock's volatility compared to the overall market. We take the beta from the industry average beta of globally comparable companies with a limit of 0.8 to 2.0, which is a reasonable range for a stable business.
SWOT Analysis of Marvell Technology
Strengths Debt is not considered a risk. Weaknesses Low dividends compared to the top 25% of dividend payers in the semiconductor market. Opportunities Losses are expected to decrease next year. Based on current free cash flows, there is a good cash runway for 3+ years. Trading more than 20% below fair value estimates. Threats MRVL has no obvious threats.
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DCF calculations are important, but ideally they shouldn't be the only analysis you use to vet a company. It's impossible to get a perfect valuation with a DCF model. Ideally, you should apply different cases and assumptions to see how they affect the company's valuation. For example, a small adjustment to the terminal value growth rate can dramatically change the overall result. Why is the stock priced below its intrinsic value? In the case of Marvell Technology, there are three key items that require further investigation:
Financial Health: Is MRVL's balance sheet healthy? Check out our free balance sheet analysis, which includes six quick checks on key factors like leverage and risk. Future Revenues: How does MRVL's growth rate compare to its peers and the broader market? Drill down into analyst consensus figures for the next few years with our free analyst growth forecast chart. Other Quality Alternatives: Prefer an all-around stock? Check out our interactive list of high quality stocks to see what others we've missed.
PS. The Simply Wall St app performs daily discounted cash flow valuations for all stocks on the NASDAQGS. If you want to find calculations for other stocks, search here.
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This article by Simply Wall St is of general nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology, and our articles are not intended as financial advice. It is not a recommendation to buy or sell a stock, and does not take into account your objectives or financial situation. We aim to provide long-term analysis driven by fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any of the stocks mentioned herein.
