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

Key Insights

• Marvell Technology's estimated fair value is US$54.43 based on 2 Stage Free Cash Flow to Equity
• Current share price of US$59.57 suggests Marvell Technology is potentially trading close to its fair value
• Our fair value estimate is 22% lower than Marvell Technology's analyst price target of US$69.70

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Marvell Technology, Inc. (NASDAQ:MRVL) as an investment opportunity by taking the expected future cash flows and discounting them to their present value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. Don't get put off by the jargon, the math behind it is actually quite straightforward.

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.

View our latest analysis for Marvell Technology

The Method

We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. To start off with, we need to estimate 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.

Generally we assume that a dollar today is more valuable 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) forecast

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF ($, Millions)	US$1.28b	US$1.68b	US$2.28b	US$2.73b	US$3.13b	US$3.47b	US$3.76b	US$4.00b	US$4.21b	US$4.39b
Growth Rate Estimate Source	Analyst x6	Analyst x5	Analyst x3	Est @ 19.97%	Est @ 14.63%	Est @ 10.88%	Est @ 8.26%	Est @ 6.43%	Est @ 5.15%	Est @ 4.25%
Present Value ($, Millions) Discounted @ 8.9%	US$1.2k	US$1.4k	US$1.8k	US$1.9k	US$2.0k	US$2.1k	US$2.1k	US$2.0k	US$2.0k	US$1.9k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$18b

After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond the first stage. 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 2.2%. We discount the terminal cash flows to today's value at a cost of equity of 8.9%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = US$4.4b× (1 + 2.2%) ÷ (8.9%– 2.2%) = US$67b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= US$67b÷ ( 1 + 8.9%)¹⁰= US$28b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is US$47b. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of US$59.6, the company appears around fair value at the time of writing. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind.

The Assumptions

We would point out that 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 8.9%, which is based on a levered beta of 1.346. 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

Moving On:

Although the valuation of a company is important, it shouldn't be the only metric you look at when researching a company. DCF models are not the be-all and end-all of investment valuation. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. 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 further factors you should further research:

1. Risks: As an example, we've found 2 warning signs for Marvell Technology that you need to consider 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.

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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.