Marvell Technology Posts Lower FCF Margins, But Revenue Is Could Surge Next Year - Is MRVL Stock Too Cheap?

Marvell Technology (MRVL), the custom system-on-a-chip designer, had lower-than-expected Q2 FCF and FCF margins, as in Q1. Nevertheless, analysts expect revenue to surge over 51% next year. As a result, MRVL stock could have over 34% upside using conservative FCF margin and FCF yield analysis.

MRVL closed down over 2.2% on Monday, Aug. 31, at $211.66. That's below its pre-earnings release peak of $251.01 on Aug. 20.

Marvell Technology's Aug. 27 Q2 earnings release shows revenue was higher than expected, according to Seeking Alpha, but earnings per share were just 1 cent better than forecasts.

As Barchart reported, its record growth in revenue and earnings was propelled by data center demand, which is expected to stay strong.

Lower FCF and FCF Margins

But here is why I think the stock is down. Free cash flow (FCF), FCF growth, and FCF margins were much lower than the high performance achieved in Q1. In short, the market was disappointed that the company didn't repeat these high growth rates and margins.

Marvell Technology doesn't report its FCF numbers. But Stock Analysis data shows that in Q2 it generated $478.8 million, compared to $414.1 million a year ago. That was 15.62% higher. However, in Q1, FCF growth YoY was higher at 125.6%.

Moreover, compared to last year's Q2, the FCF margin was lower. For example, in Q2, its FCF as a percent of revenue was 17.48% compared to 20.64% a year ago, and 19.98% in Q1.

The culprit was flat operating cash flow compared to Q1 and high capex requirements. For example, operating cash flow was $605 million in Q2 vs. $638.8 million in Q1. Investors don't like to see lower OCF, especially when revenue was higher in Q2 (i.e., $9.45 billion, +8.4% in Q2 over Q1 8.717 billion).

The point is that this has led to fears about ongoing OCF and FCF margins. But is this overdone?

Forecasting FCF

For one, over the past year, as of Q2, its FCF margins have remained strong. For example, Stock Analysis reports that the trailing 12-month (TTM) FCF margin in Q2 was 18.31%. That's only slightly lower than the Q1 TTM FCF margin of 19.11%, but much higher than the 17.04% 2026 FCF margin.

Second, next year's revenue is forecast to explode over 51%. Analysts project $18.22 billion in revenue vs. their $12.04 billion forecast for 2026. Demand from data centers for its chips is still extremely strong.

As a result, even if Marvell Technology generates just an 18.3% FCF margin, its FCF should rise dramatically:

  $18.22b revenue 2027 x 0.183 = $3.334 billion FCF

That's almost 93% higher than the $1.73 billion in FCF it has generated over the last year, according to Stock Analysis data.

This implies a much higher valuation for MRVL over the coming year.

Higher MRVL Price Targets

For example, on Aug. 31, MRVL had a $190.22 billion market capitalization. That means the market is valuing its $1.73 billion in TTM FCF at less than a 1% FCF yield:

  $1.73b / $190.22b = 0.909% FCF yield

So, just to be conservative, once the market realizes that FCF next year will reach $3.33 billion, it values this with a higher 1.30% yield (i.e., a 30.8% cheaper metric):

  $3.334b / 0.013 = $256.46 billion fair market value (FMV)

That's 34.8% higher than today's market cap. In other words, the price target (PT) is 34.8% higher:

  $211.66 x 1.348 = $285.32 PT

Analysts agree. Yahoo! Finance has an average PT of $278.89 from 44 analysts. And Barchart's PT is $290.94.

The bottom line is that MRVL stock has significant upside, despite the latest results.

Shorting OTM Puts

One profitable way to play MRVL, by setting a lower potential buy-in, and getting paid to wait, is to short out-of-the-money (OTM) puts.

For example, the $190.00 put strike price, which is over 10% below Monday's close, expiring in one month (Oct. 2, 2026), has a midpoint premium of $5.15.

That means a short-seller can make a 1-mo yield of 2.71% (i.e., $5.15/$190.00 = 0.0271).

The short seller posts $19,000 in collateral per put shorted with their brokerage firm. Then they enter an order to “Sell to Open” 1 put at $190.00 for expiry on Oct. 2. The account will then receive $515. That's 2.71% of the collateral posted.

As long as MRVL stays over $190, the obligation to buy 100 shares at $190 will go away. Then the collateral will be released. But even if an assignment is made, the breakeven point is lower:

  $19,000 - $515 = $18,485 spent on 100 MRVL shares, i.e., $184.85 per share

That is 12.67% below Monday's close. That shows that this is an attractive way to play MRVL. You get paid while waiting to potentially buy shares lower.

Moreover, the expected return (ER) is high if the investor can repeat this every month for a year: 2.71% x 12 = 32.52%. This ER is close to the 34.8% buy-and-hold ER shown above, albeit with much lower risk, since the potential buy-in is lower.

The bottom line is that shorting OTM MRVL puts is an attractive way to play MRVL over the coming year.