The global semiconductor shortage has impacted several industries worldwide. In addition, rising COVID-19 cases in China and Russia’s invasion of Ukraine could further strain the supply chain. However, the chip shortage has led to soaring chip prices, benefiting the semiconductor industry significantly. While huge investments are helping semiconductor manufacturers increase production, the supply shortage may not end anytime soon. Moreover, with 5G expansion, AI development, and rapid digital transformation, the industry is expected to see soaring demand. According to a Fortune Business Insights report, the global semiconductor market is projected to grow at a CAGR of 8.6% by 2028. As a result, both ON Semiconductor (ON) and Marvell Technology (MRVL) should benefit.
ON manufactures and sells semiconductor components for various electronic devices worldwide. The company operates in three segments: Power Solutions Group; Advanced Solutions Group; and Intelligent Sensing Group. MRVL designs, develops, and sells analog, mixed-signal, digital signal processing, and embedded and standalone integrated circuits. It offers a portfolio of Ethernet solutions, single or multiple core processors, ASIC, and printer System-on-a-Chip products and application processors.
ON has gained 37.9% over the past year, while MRVL has returned 32.56%. Which of these two stocks is a better buy now? Let’s find out.
Click here to checkout our Semiconductor Industry Report for 2022
Latest Developments
On October 19, 2021, ON announced that it had acquired GT Advanced Technologies, a producer of silicon carbide. This acquisition enhances the company’s ability to secure and grow the supply of SiC. Hassane El-Khoury, President and CEO of ON, said, "We are thrilled to have completed this acquisition, which enables us to boost SiC supply as we carry out our mission of building a sustainable future."
On April 13, 2022, MRVL announced that it has more than doubled its growth year-over-year in cloud data center Ethernet switch port shipments, based on 650 Group's quarterly switch report for Q4'21 released last month.
Recent Financial Results
ON’s revenues increased 32% year-over-year to $1.74 billion for the fiscal third quarter ended October 1, 2021. The company’s non-GAAP net income came in at $380.30 million, representing a 37.9% year-over-year increase. Also, its non-GAAP EPS came in at $0.87, up 38.1% year-over-year.
MRVL’s revenues increased 68% year-over-year to $1.34 million for the fiscal second quarter ended October 2, 2021. The company’s non-GAAP net income came in at $428.69 million, representing a 113.7% year-over-year increase. Also, its non-GAAP EPS came in at $0.50, up 72.4% year-over-year.
Past and Expected Financial Performance
ON’s revenue and EBITDA grew at CAGRs of 4.7% and 13.2%, respectively, over the past three years. Analysts expect ON’s revenue to increase 13.8% in the current year and 5.3% next year. The company’s EPS is expected to grow 42.4% in the current year and 5.7% next year. Moreover, its EPS is expected to grow at 18.8% per annum over the next five years.
On the other hand, MRVL’s revenue and EBITDA grew at CAGRs of 15.9% and 19%, respectively, over the past three years. The company’s revenue is expected to increase 36.8% in the current year and 18.3% next year. Its EPS is expected to grow 45.9% in the current year and 26.2% next year. Also, MRVL’s EPS is expected to grow at 42.1% per annum over the next five years.
Profitability
ON’s trailing-12-month revenue is 1.51 times what MRVL generates. ON is also more profitable, with an EBIT margin and net income margin of 20.55% and 14.98%, respectively, compared to MRVL’s negative returns.
Furthermore, ON’s ROE, ROA, and ROTC are 24.78%, 9.46%, and 11.49% compared to MRVL’s negative values.
Valuation
In terms of forward non-GAAP P/E, MRVL is currently trading at 27.84x, 105.8% higher than ON’s 13.53x. Moreover, MRVL’s forward EV/EBITDA ratio of 22.35x is 150.8% higher than ON’s 8.91x.
So, ON is relatively affordable here.
POWR Ratings
ON has an overall rating of B, which equates to a Buy in our proprietary POWR Ratings system. In contrast, MRVL has an overall rating of D, which translates to a Sell. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
ON has an A grade for Growth, consistent with analysts’ expectations that its EPS and revenue will increase significantly in the upcoming months. On the other hand, MRVL has a B grade for Growth.
Also, ON has a B grade for Value, consistent with its forward P/CF of 10.18x, 46.3% lower than the industry average of 18.97x. However, MRVL has a D grade for Value, in sync with its forward P/CF of 27.45x, 44.7% higher than the industry average of 18.97x.
Of the 96 stocks in the A-rated Semiconductor & Wireless Chip industry, ON is ranked #35. In comparison, MRVL is ranked #86.
Beyond what I’ve stated above, we have also rated the stocks for Quality, Momentum, Stability, and Sentiment. Click here to view all the ON ratings. Also, get all the MRVL ratings here.
The Winner
The semiconductor industry is growing exponentially despite the shortage because of the rising demand for chips, primarily from the automotive and consumer electronics sectors. While both ON and MRVL are expected to gain, it is better to bet on ON now because of its lower valuation and high profitability.
Our research shows that odds of success increase when one invests in stocks with an overall rating of Strong Buy or Buy. View all the other top-rated stocks in the Semiconductor & Wireless Chip industry here.
MRVL shares rose $0.26 (+0.41%) in after-hours trading Wednesday. Year-to-date, MRVL has declined -27.94%, versus a -6.08% rise in the benchmark S&P 500 index during the same period.
About the Author: Nimesh Jaiswal
Nimesh Jaiswal's fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock’s price is the key approach that he follows while advising investors in his articles.
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