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Better Buy: Marvell Technology Group vs. Broadcom

Marvell Technology Group (NASDAQ: MRVL) and Broadcom (NASDAQ: AVGO) have delivered strong upside to investors in the past year thanks to catalysts such as the deployment of 5G wireless networks, increase in data center capacity, higher usage of chips in the automotive industry, and the booming demand for 5G smartphones.

But if investors had to choose just one of these two high-flying chipmakers, which one should they buy?

MRVL data by YCharts

The case for Marvell Technology Group

Marvell is a high-growth company that's benefiting from its presence in lucrative niches. The company's revenue increased 20% year over year in the first quarter of fiscal 2022 to $832 million. Its earnings jumped to $0.29 per share from $0.18 per share in the year-ago period, driven by the nice jump in the revenue as well as stronger margins.

Marvell recorded an adjusted gross margin of 64.3% during the quarter, up from 62.8% during the year-ago period, continuing its trend of consistently improving the margin profile over the past year.

The good part is that Marvell is just getting started. Its Q2 revenue guidance of $1.065 billion would translate into 46% year-over-year growth, with the acquisition of chipmaker Inphi expected to add $215 million to the company's top line during the quarter. What's more, Marvell's adjusted gross margin estimate of 64% is an improvement over the year-ago period's figure of 63.3%.

Analysts expect Marvell to maintain this impressive momentum for the next two fiscal years. The company's revenue is expected to jump nearly 42% this year and more than 19% next year. Its earnings are expected to hit $1.39 per share in fiscal 2022 and $1.85 per share in fiscal 2023, up from $0.92 per share last year. However, don't be surprised to see Marvell maintain such robust growth in the long run.

Image source: Getty Images

The company is helping telecom carriers deploy 5G networks across the globe, supplying its chips to the likes of Nokia and Samsung. The South Korean giant announced earlier this year that it has developed a chip platform with Marvell that will be deployed in 5G networks from the second quarter of 2021. Samsung is using the chip platform to power its massive MIMO (multiple-input multiple-output) radios that are in tremendous demand in the 5G era.

Allied Market Research estimates the MIMO market could clock a compound annual growth rate of 35% through 2027. The Samsung partnership gives Marvell a ticket to attack this huge market as the Korean company has won deals to deploy 5G networks in the U.S. and Japan and is now conducting trials with telecom carriers in Europe.

Nokia, on the other hand, controls 25% to 30% of the 5G radio access network (RAN) outside China, according to the Dell'Oro Group. Last year, Nokia struck a partnership with Marvell to develop 5G radio technology, which should pave the way for the latter to tap into another fast-growing opportunity.

Throw in the catalysts in the storage space, which is doing well thanks to the strong demand for enterprise hard-disk drives and solid-state drives, and it becomes easier to see why Marvell is poised for long-term growth.

The case for Broadcom

The growing demand for semiconductors has helped Broadcom switch into a higher gear. The chipmaker's 2021 fiscal Q2 revenue increased 15% year over year to $6.6 billion, while adjusted earnings per share jumped to $6.62 per share from $5.14 per share in the prior-year period.

Broadcom gets its revenue from two segments -- semiconductor solutions and infrastructure software. The semiconductor business is the one that's moving the needle in a big way for the company, as it produced nearly 73% of the top line in the second quarter. The segment recorded 20% year-over-year revenue growth during the quarter to $4.8 billion. The semiconductor business derives its revenue by supplying chips to the networking, broadband, server storage, wireless, and industrial end markets.

The good part is that Broadcom is witnessing solid momentum across all of these end markets. The broadband business, which accounted for 18% of the company's semiconductor revenue in Q2, recorded a 28% year-over-year revenue increase on the back of increased infrastructure investments by service providers to boost connectivity. The chipmaker expects this momentum to continue as service providers upgrade broadband infrastructure to next-generation technologies.

For instance, next-generation 10G passive optical networks (PON) account for only 30% of the overall network. Meanwhile, cable operators in the U.S. are now deploying next-generation modems to enable faster broadband speeds. In all, Broadcom expects the broadband investment cycle to continue into 2022.

The networking business is the next big growth driver of the semiconductor systems business, producing 32% of the segment's revenue last quarter. Broadcom saw 10% year-over-year growth in this segment on the back of robust demand from hyper cloud data centers and telecom companies. Looking ahead, Broadcom expects hyper cloud infrastructure providers to upgrade their infrastructure and drive further growth in the routing business.

However, the enterprise segment has been a weak link, with revenue from the segment down 16% last quarter. The good news is that Broadcom sees a recovery in this business thanks to the deployment of new server chip platforms from Intel and Advanced Micro Devices.

And finally, the wireless business that accounted for 34% of semiconductor revenue last quarter is in fine form. The segment recorded 48% year-over-year growth last quarter as Broadcom saw higher-than-expected demand. The company also recorded content gains in Wi-Fi chips and wireless connectivity chips used in smartphones.

It is worth noting that the wireless segment seems capable of sustaining its high levels of growth as Broadcom is supplying chips to 5G smartphone OEMs (original equipment manufacturers), such as Samsung and Apple. The iPhone maker is one of Broadcom's key customers as it has struck an agreement with the latter to buy $15 billion worth of smartphone chips through the second half of 2023. And given that the 5G smartphone market is set to record explosive growth in the coming years, Broadcom could turn out to be a top 5G stock in the long run.

The verdict

Both companies are sitting on solid growth drivers that could help them deliver sustained upside to investors, but Broadcom seems to have an edge.

First, Broadcom's price-to-sales (P/S) ratio of 8 makes it cheaper than Marvell, which trades at 13 times sales. (Marvell's forward price-to-earnings (P/E) ratio of 45 is also on the expensive side compared to Broadcom's multiple of 23.)

Second, Broadcom sports a dividend yield of almost 3% as compared to Marvell's yield of just 0.4%.

Additionally, Broadcom's supplier relationship with smartphone giants Apple and Samsung will allow it to take advantage of the 5G smartphone market's rapid growth, an area where Marvell will miss out, as it exited this business years ago. Of course, Marvell stands to gain from the 5G infrastructure market, but Broadcom isn't going to miss out on that opportunity either: It too has partnered with Nokia to make chips for 5G base stations.

All of this makes Broadcom a better long-term bet, especially considering its cheap valuation and juicy dividend.

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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Advanced Micro Devices and Apple. The Motley Fool recommends Broadcom Ltd, Intel, and Marvell Technology Group and recommends the following options: long January 2023 $57.50 calls on Intel, long March 2023 $120 calls on Apple, short January 2023 $57.50 puts on Intel, and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.

This disclosure was generated by hand. 


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