2023-09-22 11:13:49 ET
Summary
- After digesting the company’s expectations for AI-related revenue to double this year, I concluded on June 5 that Marvell stock was fairly valued in the market at the time.
- After revisiting my thesis for the company, its current valuation, and recent earnings revision activities, I am inclined to believe Marvell stock is nearing an inflection point.
- Marvell’s high-speed, cloud-optimized Digital Signal Processors will play a key role in enabling high-bandwidth connectivity for various AI applications.
- The adoption of AI on a global scale across various business sectors will force data centers to upgrade their infrastructure, and Marvell will play a key role here.
- The data center storage market and the enterprise networking end market will prove to be pain points for the company for the foreseeable future.
The 30 days preceding June 5 was a month to remember for Marvell Technology (MRVL) investors as the company's stock price gained more than 50% during this period. After digesting the company's expectations for AI-related revenue to double this year, I concluded on June 5 that Marvell stock was fairly valued in the market at the time, leaving investors with no margin of safety to invest in the company. Since then, MRVL has underperformed the broad market by losing more than 10% of its value against a 1.3% gain registered by the S&P 500. Yesterday, The Information reported that Alphabet Inc. ( GOOG ) could replace Broadcom ( AVGO ) with a custom chip from Marvell. Although this was not confirmed by any related parties, I would not be surprised if Marvell wins big tech companies in the foreseeable future with its custom silicon programs designed to support various AI applications and integrations. After revisiting my thesis for the company, its current valuation, and recent earnings revision activities, I am inclined to believe Marvell stock is nearing an inflection point.
Fiscal 2024 Continues To Be A Mixed Bag
Marvell has captured the attention of investors this year with the rise of AI technology as it quickly emerged as a key infrastructure solutions provider enabling the deployment of various AI applications. The company, in my opinion, is well-positioned to register stellar AI revenue growth as AI adoption continues to gain momentum. Growth will come from different avenues.
First, Marvell's high-speed, cloud-optimized Digital Signal Processors will play a key role in enabling high-bandwidth connectivity for various AI applications. AI applications, particularly those involving machine learning and deep learning, require massive computational power and high-speed data transfer. Marvell is well-equipped to meet this need by providing high-bandwidth connectivity solutions. The company's PAM4-based optical DSPs and Adaptive Equalization Circuits are widely used for connecting accelerator clusters inside AI data centers. These solutions enable the rapid transmission of large datasets between AI servers and accelerators. Based on the product website , PAM-4 DSPs can help Ethernet infrastructure upgrades to higher speeds from 50G to 1.6T and beyond.
Exhibit 1: Massive bandwidth requirements of AI
Marvell's strategy revolves around developing advanced silicon solutions for data infrastructure. AI relies heavily on data infrastructure, making Marvell's focus on this area highly relevant. The company's continuous investment in refreshing its product portfolio positions it as a reliable partner for companies looking to expand their AI capabilities.
Second, the adoption of AI on a global scale across various business sectors will force data centers to upgrade their infrastructure, and Marvell will play a key role here. As AI models become more complex and require more training data, data centers must scale their infrastructure to accommodate the increased demand. Marvell's technologies, including optical DSPs and coherent DSPs, play a vital role in enabling this scaling by providing the high-speed, reliable connectivity required for AI workloads. I expect the company's data center business to be an indirect winner of the ongoing AI boom. According to SDxCentral, data centers will need to invest in next-gen DCPI that supports higher energy needs, infrastructure projects to improve the rack power densities from around 10 kW per rack to 20kW per rack, and higher power-rated rack power density units that enable remote monitoring of power infrastructure.
Marvell recently announced the release of Orion, the industry's first 800-gig coherent optical DSP for pluggable modules. This technology is expected to drive Marvell's leadership in coherent technology in the carrier optical transport market and data center interconnects. The introduction of COLORZ 800, an 800-gig DCI ZR module, will also bring in new growth opportunities for the company in the future.
Third, the demand for custom silicon programs is increasing as companies incorporate AI into their business processes, and Marvell is emerging as a key solutions provider in this niche. Marvell has won several custom silicon programs tied to AI. These programs involve the development of specialized hardware accelerators and custom silicon optimized for AI tasks. Through custom silicon programs, Marvell offers tailor-made solutions that meet the specific requirements of AI workloads. This positions the company to benefit from the growing trend of companies building custom AI accelerators to enhance their AI offerings. A classic example is how Marvell has captured the attention of automotive companies with its custom silicon solutions for autonomous driving.
Exhibit 2: An illustration of Marvell's custom silicon solutions for the automotive sector
The outlook for Marvell's AI-related revenue is promising, and the company has guided AI revenue to hit an annual run rate of around $200 million by the end of the current fiscal year. The challenges come to light when we look at the broad picture for Marvell.
While Marvell expects growth in data center revenue from AI applications, the recovery in the data center storage market has been slow, and customer inventory remains high. The timing of a full recovery in this market is uncertain. During the recent earnings call , Marvell CEO Matt Murphy said:
Storage end market demand remains significantly depressed and customer inventory remains high. As a result, the industry's expectations for a data center storage recovery have pushed out meaningfully.
The enterprise networking end market has also been impacted by inventory corrections, and it may take several quarters to resolve these issues. Marvell anticipates a decline in revenue in this market in the next few quarters.
Overall, I believe the strength in the AI business will be offset, at least partially, by the continued weakness in both the enterprise networking and data center storage businesses. Fiscal 2024, therefore, is likely to be a mixed bag for Marvell.
More Reasonable Valuation And Positive Earnings Revisions
Marvell is now valued at a more reasonable forward P/E of 34, and I am increasingly beginning to turn bullish on the prospects for the company at these prices given that the AI business is gaining strength as expected. Although the company is not cheaply valued, a broad recovery of the chip sector in 2024 should help Marvell attract premium valuation multiples given the company's presence in high-growth end markets. Encouragingly, earnings revisions have also trended positively in the last 90 days, with Wall Street analysts boosting their EPS estimates for Fiscal 2024 13 times in the last 90 days against nine downward revisions. When I published my previous article on Marvell, the company had suffered 26 downward revisions in the preceding 90 days.
Exhibit 3: Earnings revision trends
I strongly believe that earnings revisions play a key role in helping stocks gain momentum in the market, and from this perspective, Marvell is moving in the right direction
Takeaway
Marvell Technology is well-positioned to play a key role in the AI revolution, but some of the company's other business units will remain under pressure in the foreseeable future, painting a mixed outlook for the current fiscal year. In the long term, the company should benefit from several growth catalysts in both AI and non-AI domains. The company is reasonably valued in the market - especially compared to June when I last analyzed its prospects - and I believe MRVL stock will show some strength, aided by positively trending earnings revisions. Based on the findings of this analysis, I am changing my rating on Marvell stock to buy from hold .
For further details see:
Marvell Stock Is Nearing An Inflection Point (Rating Upgrade)