2023-12-01 11:29:27 ET
Summary
- Marvell Technology's stock price dropped despite beating earnings estimates due to weak guidance for Q4.
- The company's data center segment performed well, with strong growth in cloud and AI revenue.
- Marvell's custom silicon programs and collaborations position it well in the data center and AI markets, but the company faces challenges in other end markets.
- I believe the good outweighs the bad today for reasons discussed in this article, but I am forced to downgrade my rating for Marvell from buy to hold.
More often than not, better-than-expected earnings fail to drive stock prices higher when companies issue weak guidance. This is what seems to be happening with Marvell Technology, Inc. ( MRVL ). After topping Wall Street estimates for both earnings per share and revenue for the third quarter , MRVL stock lost close to 5% in after-hours trading yesterday after the company's guidance for fourth-quarter revenue and earnings fell short of analyst estimates.
Last September, based on the company's reasonable valuation, growth prospects, and positively trending earnings revisions, I thought Marvell stock was nearing an inflection point. The stock is up close to 7% since then, based on yesterday's closing market prices. After digesting yesterday's earnings report, I still believe Marvell has something to offer long-term-oriented at its current valuation level, but I am downgrading the stock to a hold .
Marvell's Outlook Is A Mixed Bag; But The Good Outweighs The Bad
To briefly recap yesterday's earnings report, Marvell reported revenue of $1.42 billion for Q3, a decline of almost 8% compared to the corresponding quarter in 2022. The adjusted EPS came to 41 cents, slightly ahead of the 40 cents expected by analysts. We need to dig deeper to understand the prospects for Marvell's end markets.
In the third quarter, the data center market performed well with revenue hitting $556 million, which was ahead of management expectations. On a sequential basis, data center revenue grew 21% in Q3 and cloud revenue grew more than 30%. The management attributed this stellar performance to the continued growth of AI revenue. Revenue from the data center segment is projected to grow in the mid-30% range on a sequential basis in Q4, with strong demand for AI cloud infrastructure proving to be the key growth driver. Marvell's recent performance in both cloud and AI sectors gives me hope that the company will return to growth in the foreseeable future. For context, the company has reported YoY declines in sales in each of the last three quarters.
As highlighted in my previous article, the demand for custom silicon programs is increasing as businesses try to incorporate AI technology into their processes. Marvell's tailor-made solutions that can be designed to meet the unique requirements of different AI workloads, in my opinion, will attract robust demand in the coming years.
- Marvell is actively involved in the data center space, particularly in the development of custom silicon for AI accelerators. These accelerators play a crucial role in enhancing the performance of AI workloads, making them a key component in modern data center architectures.
- The success of Marvell's custom silicon designs can be seen from the strong demand for Marvell's 800-gig PAM electro-optic products.
- Marvell has expanded its custom silicon programs from processing units to connectivity solutions and provides a range of high-performance connectivity solutions for data centers, including optical interconnect technology and Ethernet switches.
- The recent collaboration with Nvidia Corporation ( NVDA ) highlights Marvell's role in providing optical interconnect technology to enable the bandwidth scale and reliability required by generative AI.
- Marvell is actively working on its next-generation 51.2T cloud switching platform, demonstrating its commitment to innovation in open Ethernet-based cloud fabrics. This is an area that could help Marvell garner strong demand in the foreseeable future.
Overall, I expect Marvell to emerge as a big winner in the ongoing transformation of data centers to support increased bandwidth to power AI applications.
While the data center segment is continuing to grow, Marvell is facing challenges in other end markets, especially in the carrier infrastructure market and enterprise networking market.
Carrier infrastructure segment revenue of $317 million in Q3 was better than the company's guidance and was a 17% YoY improvement. This robust growth, however, is unlikely to last long. Company filings show that this growth was driven by strong momentum in the wireless revenue. Starting from the fourth quarter, Marvell expects wireless revenue to decline as the initial wave of the 5G rollout is ending. The softening demand for this segment will likely prove to be a drag on revenue growth starting from the fourth quarter.
Enterprise networking revenue declined by 28% in the third quarter to $271 million, and the management guided for a more modest sequential decline in the coming quarter.
The automotive and industrial segment, which registered a robust 26% YoY revenue growth in Q3, is also expected to report a sequential decline of approximately 20% in the fourth quarter, which signals the unfavorable demand environment for this sector.
Looking ahead, I believe many of Marvell's end markets will remain under pressure, but the continued growth of the cloud and AI sectors is likely to offset the negative impact coming from other end markets. Sequentially accelerating revenue growth in the cloud segment - from around 20% in Q2 to 30% in Q3 - is a clear indication of the strong demand for this business segment. Even in my previous article, I claimed that Fiscal 2024 will be a mixed bag for the company, and I do not have any reason to take that back after digesting Q3 earnings. That being said, I believe the good outweighs the bad today, giving investors hope for a growth resumption in the next calendar year.
Valuation Remains Attractive
Despite seeing some modest gains since my previous article, I believe Marvell remains fairly valued. At a forward P/E of 36, Marvell may not look cheaply valued, but I believe the company deserves to attract premium valuation multiples in the market given that the company still has a long runway to grow in the fast-growing data center AI market. Unlike in September, however, earnings revision s have started trending lower, which could be an early indication of short-term stock market struggles for Marvell.
Takeaway
Marvell's third-quarter financial performance was mixed, as expected. A closer look at the end markets served by the company, however, suggests that the good outweighs the bad today, which makes Marvell reasonably valued in the market. Based on the recent price strength of MRVL stock and the negative trends in earnings revisions, I am downgrading my rating for Marvell stock from a buy to a hold .
For further details see:
Marvell Q3 Earnings: Mixed Outlook, But Good Outweighs The Bad