Marvell Technology, a semiconductor company specializing in integrated circuits tailored for the data center space, has had a remarkable year. The stock has soared nearly 90% year-to-date, with its market capitalization now approaching $100 billion. This strong performance has meant that Marvell’s valuation is actually ahead of CPU giant Intel, whose stock has struggled with a 55% decline over the same period. Marvell’s success can be attributed to its pivot toward catering to the generative AI market with its interconnection solutions and its custom AI processors seeing strong demand. Here’s a closer look at what’s driving Marvell’s performance. Separately, if you want upside with a smoother ride than an individual stock, consider the High Quality portfolio, which has outperformed the S&P, and clocked >91% returns since inception.
Marvell’s Big AI Push
Marvell’s entry into the AI market was led by its interconnect solutions for data centers. The company sells high-speed interconnects which are essential for handling the data-intensive nature of generative AI and machine learning workflows. Generative AI models and machine learning workflows are extremely data-intensive and require high speeds of transmission and parallel processing capabilities. This is putting a strain on existing infrastructure and causing companies to adopt high-speed optical and electrical interconnect technologies, such as those provided by Marvell, to meet these demands efficiently.
However, the bigger opportunity for Marvell is in the application-specific integrated circuits (ASICs) for AI workloads. These chips are tailor-made for hyperscaler data centers. These custom chips also have some advantages over GPUs and can be designed for specific AI tasks versus general-purpose GPUs. By focusing on more targeted functionalities, specialized chips can reduce costs compared to GPUs, which are meant for broader applications. Energy efficiency can also be improved, while performance can also be optimized better compared to general-purpose GPUs provided by the likes of Nvidia and AMD. This could provide the company with some room to grow.
Recent Financials And Outlook
Marvell’s recent financial performance has been better than expected. In Q3, the company posted sales of $1.52 billion, marking a 7% year-over-year increase, with adjusted earnings coming in at $0.43 per share. The standout performer was the data center segment, which grew by a solid 98% year-over-year, accounting for over 70% of total revenue. While data center growth has been impressive, other segments – which include enterprise networking, automotive, and carrier infrastructure – witnessed year-over-year declines. The company’s gross margins have also been mixed, coming in roughly flat versus last year, despite the strong revenue growth, as custom AI chips are less profitable at this juncture.
Marvell has been expanding its partnerships with key AI players, including Amazon Web Services which recently expanded deals with the company for data center semiconductors, including custom AI products. Other players such as Google and Microsoft could also emerge as large customers, as they seek alternatives to Nvidia’s current monopoly over AI compute. Overall, Marvell projects 26% revenue growth for the upcoming quarter. The company says that its AI-related revenue for this year will exceed $1.5 billion, and has set a goal of $2.5 billion for the next year. Given its growing traction with hyperscalers and its expanding product portfolio, Marvell may well surpass these estimates.
Putting Marvell’s Valuation Into Perspective
The increase in MRVL stock over the last 4-year period has been far from consistent, with annual returns being considerably more volatile than the S&P 500. Returns for the stock were 85% in 2021, -57% in 2022, and 64% in 2023. In contrast, the Trefis High Quality Portfolio, with a collection of 30 stocks, is considerably less volatile. And it has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics.
Given the current uncertain macroeconomic environment around rate cuts and multiple wars, could MRVL face a similar situation as it did in 2022 and underperform the S&P over the next 12 months – or will it see a strong jump?
Marvell stock currently trades at approximately 40x its estimated FY’26 earnings and about 70x FY’25 earnings, which is a steep multiple. The company’s revenue growth is projected at just 4% for FY’25 but is expected to accelerate to 40% in FY’26 per consensus estimates. In comparison, Nvidia trades at a more reasonable 33x FY’26 earnings, despite its more established position in the AI hardware space and stronger recent growth. However, some shifts in market dynamics actually justify Marvell’s valuation.
For one, as companies prioritize returns on AI investments, they may become more judicious with spending, potentially impacting Nvidia’s highly elevated margins. Big companies could seek alternatives from rivals, and Marvell’s specialized models could be a top choice for hyperscalers. Moreover, companies have invested heavily in AI model training, but this is a one-time affair that has significantly benefited Nvidia due to its cutting-edge GPUs. As AI models grow larger, incremental performance gains may diminish, and the availability of high-quality training data could become a bottleneck. The market could potentially shift from large-scale general-purpose AI models to smaller, specialized ones, potentially helping more niche players like Marvell who offer tailored products that optimize costs and performance for specific applications. See how a shifting AI market could put Nvidia at a disadvantage Sell Nvidia, Buy Intel Stock?
Invest with Trefis Market Beating Portfolios
See all Trefis Price Estimates