Bank of America: BofA downgrades Marvell and cuts price target as Lumentum acquisition adds uncertainty

Why did BofA downgrade Marvell?

BofA downgraded Marvell from Buy to Neutral and cut its price target from $400 to $225, while maintaining its earnings forecasts. The bank believes the all-stock acquisition of Lumentum could weigh on the share price for a prolonged period, and industry valuation multiples have recently contracted.
The new price target uses a 20 times expected price-to-earnings multiple for calendar year 2028, after accounting for stock-based compensation expense, down from 33 times previously; the Philadelphia Semiconductor Index fell 19% in the month before the report was published.

BofA recognizes the deal's strategic value: Lumentum's lasers, optical circuit switches, optical transceivers and indium phosphide manufacturing capabilities can be combined with Marvell's digital signal processors, transimpedance amplifiers, drivers, silicon photonics and switching businesses to create a broader electrical-to-optical connectivity platform.
Both companies benefit from AI demand. BofA expects the combined company's potential market to reach $550 billion in calendar year 2030, with new opportunities coming mainly from near-packaged optics, co-packaged optics and emerging scale-up connectivity; Lumentum has also announced that it secured a second major near-packaged or co-packaged optics program, expected to generate more than $5 billion in revenue.

BofA estimates that the all-stock deal will increase the share count by approximately 50%. Based on market consensus estimates, the bank calculates that even if approximately $1.1 billion in cost synergies are achieved, the additional profit would struggle to offset the dilution of earnings per share from the larger share count.
In a scenario without revenue synergies, the combined company's earnings per share for calendar years 2029 and 2030 would be 10.5% and 14.7% lower, respectively, than Marvell's on a stand-alone basis; even with approximately 5% in revenue synergies, they would still be 7.0% and 12.4% lower, respectively.

Marvell has supplied processors, amplifiers and drivers to numerous optical module manufacturers; Lumentum supplies lasers and also competes with those manufacturers in the optical transceiver market. BofA therefore worries that customer or channel conflicts could arise after the merger.
Marvell expects the deal to close in the first half of calendar year 2028. BofA believes the approval process could be lengthy, including regulatory procedures in China; until closing, regulatory and financial risks could continue to affect the share price.