We’re Lifting Our Price Target for Costco, as Marvell Backs Our Thinking
Costco’s membership price hike is still a 'when' event.
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* We are lifting our Costco price target to $850 from $830 following last night’s consensus-topping earnings report.
* Costco’s membership price hike is still a “when” event.
* We reiterate our One rating and our $95 price target after Marvell’s latest earnings report.
* Marvell’s Data Center strength to continue, Networking and Enterprise rebound coming.
Last night both Costco COST and Marvell MRVL reported their latest quarterly results, with Costco’s topping expectations and Marvell’s results and outlook for the current quarter matching expectations.
To say expectations for both were very high going into those reports given the more than 16% move in MRVL shares and the almost 13% increase in COST shares over the last month is a bit of an understatement.
While many across Wall Street are lifting their respective COST and MRVL price targets this morning, some are grumbling that Costco’s results weren’t strong enough, while others are surprised Marvell didn’t offer more robust guidance for the current quarter. What we saw in both reports and management comments only reaffirmed our thinking on both stocks.
Marvell confirms our thinking
While Marvell’s data center business was strong as expected, up 87% year over year and 7% sequentially, its Carrier Infrastructure and Enterprise Networking businesses were as expected for the April quarter. Our view has been that those two businesses should start to rebound in 2H 2024 and accelerate over the ensuing quarters as AI and AI-on-device adoption grows.
To that end, Marvell guided both businesses to be flat in the current quarter and start to recover in the second half of this year. That means data center will continue to be the driver for the current quarter, aided by ramping custom compute AI programs, which should accelerate substantially in H2 2024 and have a full year of production volume next year.
The H2 2024 and beyond outlook is what our MRVL thesis has centered on, and it explains why Oppenheimer, Stifel, Jefferies, and others are boosting their price targets to $90 from the low to mid $70s. We’re keeping our $95 target intact and intend to hold MRLV shares as our thesis plays out.
Boosting our Costco price target, and here's what could make us do it again
We are boosting our COST price target to $850 from $830 as the company remains well positioned with consumer spending patterns, and expansion plans for its footprint. As you can imagine, the topic of the long-expected membership price increase was discussed on the earnings call. CFO Gary Millerchip said it is a question of when the retailer increases the membership fee rather than if it increases the fee.
In other words, the message to investors remains it’s only a matter of time. When that happens, it will give us a reason to revisit our price target yet again. Upcoming monthly sales reports from Costco may give us another reason if they continue to show COST taking far more consumer wallet share than expected.
At the time of publication, TheStreet Pro Portfolio was long COST, MRVL.
