We're Calling Up a Bullpen Name and Trimming Another Stock That's Losing Flavor

Action Alerts PLUSBullpen name Marvell Technology  (MRVL)  revealed on Thursday night mixed quarterly results. Guidance fell short of Wall Street's expectations -- especially on the bottom line, where it called for earnings per share of $0.24-$0.34 vs. the $0.41 consensus forecast for the current quarter.

Driving those lower expectations were inventory adjustments across its data center, enterprise networking and carrier infrastructure end markets, as well as pushouts for certain design wins. But most of that is expected to improve in the coming quarters, with the current one poised to be its weakest bottom-line performance for the year. In response we are seeing a number of price targets fall to the $50-$60 range from $55-$70.

Despite that guidance and target, MRVL shares are not getting pasted as one might have expected in lieu of that EPS guidance. We see a similarity to what's playing out with our shares of ChargePoint (CHPT) , which were down as much as low double-digits, but have since rallied back. We see this as an indication the market largely recognizes the near-term pain ahead, and with today's added move lower the market has largely priced it into MRVL shares. Essentially a pushout in the expected rebound in revenue growth. One potential tailwind that could emerge in the coming months is the company's China customer base, which fell to less than 10% of total company revenue in recent quarters. As China's re-opening continues, something we saw in the February Manufacturing PMI data out earlier this week, the resumption of demand could speed Marvell's revenue rebound.

We could see some market disruption ahead, especially as we get closer to the Fed's March policy meeting. That is the very near-term, but as we discussed Thursday, our intent with MRVL shares is to take a 12-24 month view. The crux of our thesis hinges on continued content creation and consumption that will drive network traffic growth, driving the need for incremental capacity and other solutions. Pointing to that rising demand that necessitate network densification and the further build out of digital infrastructure, Ericsson (ERIC)  sees global monthly average usage per smartphone reaching 46 gigabytes (GB) by the end by the end of 2028 vs. 19 GB in 2023 and 15 GB in 2022.

We recognize one risk here is we are still somewhat early in calling MRVL shares up from the Bullpen, but we also recognize it is incredibly difficult the time the bottom in a stock. Another challenge is the expected inventory burn takes longer than expected. If that comes to pass, we could see MRVL shares rangebound over the next six months or so.

Recognizing that, we will start off a small position in MRVL shares, with a $52 price target and a "Two" rating. In keeping with that rating, we would look to build on the position on share price weakness or signs end market demand is picking up quicker than expected. From a technical perspective, MRVL shares have support at $40-$41 with even stronger support at $38, and we would look to get more aggressive in the shares closer to $38 should it come to pass.

As we make this move, we will continue to use the shares of Four rated McCormick & Co. (MKC)  as a funding vehicle.

After you receive this Alert, we will make the following trades:

-- Sell 230 shares of McCormick & Co. at or near $72.60. Following the trade, MCK will account for roughly 1% of the portfolio's assets.

-- Buy 410 shares of Marvell Technology at or near $42.50. Following the trade, MRVL will account for roughly 0.5% of the portfolio's assets.

(Please note that we are looking to execute these trades at or near the share price mentioned above. Once the trade is completed, subscribers can see the trade's executed pricehere. Be sure to toggle the chart to sort by Purchase Date.)

At the time of publication, AAP was long MKC and CHPT.