To The Moon

$Marvell Technology(MRVL)$

Earning Overview

For Q4 fiscal 2024, Marvell Technology reported net revenue of $1.427 billion, exceeding the midpoint of its guidance from November 2023. The company posted a GAAP net loss of $392.7 million, or $0.45 per diluted share, but on a non-GAAP basis, it achieved net income of $401.6 million, or $0.46 per diluted share. Cash flows from operations for the quarter were $546.6 million. For the full fiscal year 2024, Marvell's net revenue totaled $5.508 billion, while it reported a GAAP net loss of $933.4 million, or $1.08 per diluted share.

Fundamental Analysis

Marvell Technology (MRVL) reported negative earnings in its recent financial results. For Q4 of fiscal 2024, the company posted a GAAP net loss of $392.7 million, or $0.45 per diluted share. Additionally, Marvell's full fiscal year 2024 results showed a GAAP net loss of $933.4 million, or $1.08 per diluted share. Despite this, the company did report positive non-GAAP earnings, with Q4 net income of $401.6 million, or $0.46 per diluted share. The negative GAAP earnings were primarily due to various factors including increased operating expenses and other financial challenges.

Cash Flow & Debt Issue

For Q4 of fiscal 2024, Marvell Technology reported cash flows from operations totaling $546.6 million. This indicates a strong ability to generate cash from its core business operations despite the reported net loss.

As for liabilities, Marvell's total liabilities stood at $5.1 billion as of the end of fiscal 2024. This includes both short-term and long-term obligations, reflecting the company's overall financial obligations. However, the company has been managing these liabilities in line with its cash flows and operations, though it’s important for investors to monitor these figures closely to assess long-term financial stability.

(MRVL) has experienced concerns related to its debt levels. As of fiscal 2024, the company reported a total of $5.1 billion in liabilities, which includes both short-term and long-term debt. While Marvell has been able to generate strong cash flows from operations (e.g., $546.6 million in Q4 of fiscal 2024), its debt load can pose challenges, especially during economic downturns or if earnings do not improve as expected.

One of the key risks for investors is the potential difficulty in managing or servicing the debt, particularly in the context of cyclical pressures that affect the semiconductor industry. While Marvell’s cash flow has helped mitigate the impact of debt in the short term, the company’s reliance on external financing raises concerns about its ability to weather long-term financial strains without jeopardizing profitability or incurring more debt to refinance existing obligations.

Investors should keep an eye on Marvell’s debt-to-equity ratio, interest coverage, and its ability to meet debt obligations without impacting its operational flexibility.

The Importance of Historical Performance

This -is particularly useful in the early stages of investing because you can look at past performance to get an idea of how things might unfold. In my experience, about 80% of the time, the past provides a solid guide for the future—provided you apply some logic and avoid common pitfalls like rising debt levels. As long as you watch out for these, historical trends tend to hold up. It's important not to fall for the "this time is different" mentality. Even when things are different, they often aren’t different enough to change the overall trend.

2006-2008 Financial Crisis and Recovery

Take a look at the period from 2006-2008, when Marvel was hit by a significant downturn. During that time, earnings plummeted more than 100%, going negative in 2007. However, earnings eventually rebounded. A key takeaway is that even though earnings recovered fairly quickly, they didn’t reach their pre-crash peak again until 2023, which was fueled by stimulus and the rise of AI (though stimulus played a larger role). Between 2011 and 2020, earnings never reached their previous highs, and the stock price didn’t recover its old peak of $35 a share until 2020, 15 years later. For my investment standards, I typically prefer stocks to return to their peak within 5 years.

The Impact of Delayed Recovery

While I wouldn’t consider Marvel uninvestable just based on this, I don’t track it right now because of this delayed recovery. However, there are cases where a "super cycle" can explain these delays. If you disregard the extreme peak, such as the one from 2007, the stock price recovered much faster after falling, which is more in line with how I usually approach investments. In hindsight, if you bought at the bottom ($10 per share), you'd have made about 100% return.

Current Market Conditions and Cyclical Patterns

Now, we see a similar scenario playing out. The stock has dropped significantly, and it may be poised to drop even further. Looking at the recent price movements, we can see a large "blowoff" peak—similar to what happened during the AI-driven bubble in tech stocks. This peak, around $70 a share, looks like the real peak before the stock started its downturn. If we look further, the stock price is likely to end up closer to this lower range, and in hindsight, this will likely appear as another "super spike" event driven by market speculation.

Earnings and Market Expectations

Marvel recently reported strong earnings, but it seems the market is reacting to the outlook. This is common in cyclical businesses like Marvel’s—where stock prices can drop even when earnings are solid because the market anticipates potential challenges. Once you establish a business as cyclical, it’s essential to stop focusing too much on earnings for valuation purposes. Even though earnings were strong, the market’s reaction has been to sell off based on future concerns.

Comparing Current Trends with 2008

Looking at the historical trend, we’re seeing similar PE (price-to-earnings) levels to those established during the peak before the 2008 crash. These parallels suggest that the current stock behavior could be setting up for a similar cycle.

Stock Price Decline and Market Estimate

Currently, the stock has dropped around 30%, and with an additional 20% decline, it could be down about 40-45% from its peak. I don't have today's data yet, but this is my estimate based on available information. Let’s go back and look at how the stock behaved in the past.

Historical Peak and Recession Timing

We saw a similar peak in the past, followed by a recession a couple of years later. You could point to any of these peaks, but I’m focusing on the most recent one. If we trace from the top and measure the decline, the stock fell by more than 85% during the 2008 downturn. This serves as an important comparison for today's market.

Challenges with Cyclical Investing

One common pushback I get regarding cyclical investing is that people believe things are different now. They argue that we're in a new growth phase with semiconductors and AI driving things forward. While that may be true to some extent, 2022 showed us how the market reacts to these kinds of stocks during difficult times. The stock fell 60% in 2022 without a recession, which is a strong indication that if another recession occurs, the stock could fall 85% again. The market seems to have little faith in the AI-driven growth narrative at this point.

The 2022 Decline and What It Tells Us

Even without a recession, the stock experienced a massive drop of 60% from its peak in 2022. This suggests that the market is already anticipating risk, regardless of the bullish stories surrounding AI. The possibility of an 85% decline remains high if we enter a recession, and even without one, the stock could still fall another 60%, based on the 2022 trend. This highlights the potential for further significant losses.

Potential Buying Points and Return Estimates

Given these conditions, I wouldn't consider buying the stock until it falls closer to 80% off its highs. If the stock were to hit around $30 a share, I could see it as a good buying opportunity, with potential for a 150% return if it reaches a price around $75. However, you wouldn’t want to hold out for the peak, as it took 15 years for the stock to recover from its previous high. Aiming for a more reasonable target could give you a solid return in a shorter time frame.

Risk of Buying Too Soon

One of the biggest mistakes investors make with cyclical stocks is buying too soon during a downtrend. If you buy at $70 and it falls to $20, you’re in for a painful ride, even if you eventually see gains. The key is to wait for the stock to reach a lower price before stepping in. Looking at past market behavior, particularly what happened in 2022, we can see that the stock is likely to undergo similar volatility unless there's a major shift in the macroeconomic environment.

Cyclical Investing Strategy and Patience

Patience is key with cyclical stocks. It’s important not to panic and to stick to a strategy. In times like this, when the market is showing clear signs of volatility, it’s crucial to wait for favorable conditions. I've been building a balanced portfolio over the past few years, which has helped reduce the impact of market drops. We're currently holding over 40% cash in the portfolio, waiting for the right opportunities. It’s all about being patient and waiting for stocks to become undervalued before buying.

Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.

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