2023-06-05 11:15:28 ET
Summary
- Marvell Technology stock has surged more than 50% in the last 30 days, driven by optimistic predictions that its Artificial Intelligence-related revenue will double this year.
- Q1 earnings were not spectacular, but the guidance for the second quarter has boosted investor confidence.
- Marvell is strategically well-positioned to play an important role in the adoption of AI technology.
- Although long-term prospects seem bright, I am inclined to wait for a better opportunity to invest in the company, as my earnings events-based investment strategy suggests MRVL will lose momentum in the future.
Marvell Technology Inc ( MRVL ) stock has surged more than 50% in the last 30 days driven by optimistic predictions that its Artificial Intelligence-related revenue will double this year. As part of the rapidly expanding group of tech companies embracing this groundbreaking technology, Marvell aims to capitalize on AI’s potential, which has already attracted stock market bulls. Additionally, the company reported impressive financial performance for the first quarter of fiscal 2024, and the guidance for the current quarter is promising, with AI emerging as a significant catalyst for growth. Despite many promising signs that point toward earnings growth, I am wary of investing in MRVL today.
The Guidance For Q2 Has Boosted The Investor Sentiment
Marvell Technology reported revenue of $1.32 billion for the first quarter of fiscal 2024, surpassing expectations of $1.30 billion. However, when compared to the same period last year, net revenue declined by 9%. In terms of revenue distribution across different sectors, enterprise networking contributed the most with 27% of the total revenue, followed by carrier infrastructure at 22%, consumer at 11%, and auto industrial at 7%. The company achieved a net income of $264 million on a non-GAAP basis. Cash flow from operations for the first quarter was $208.4 million.
Exhibit 1: Q1 financial performance metrics
Within the data center end market, revenue for the first quarter was $436 million. This represents a decline of 32% compared to the previous year and a 12% decrease sequentially. This decline was primarily driven by the storage sector. However, the company's overall data center revenue exceeded expectations, primarily due to increased demand for its optical data center interconnect products in the cloud sector. The demand was also driven higher by the expansion of AI deployments. Despite the decline in revenue in the first quarter, the company expects sequential growth in the second quarter, particularly in the data center storage business. The company anticipates revenue from the cloud sector to grow over 10% sequentially whereas a decline in the enterprise on-premise portion of the data center end market is expected to offset the cloud growth. The company expects overall revenue from the data center end market to remain flat sequentially in the second quarter.
In the carrier infrastructure end market, revenue for the first quarter was $290 million, up 15% year-over-year and 5% sequentially. The company experienced strong demand for its wireless products, driven by the expanding adoption of 5G in new geographic regions and customer-specific product ramps. The company expects revenue to grow by mid-single digits in the next quarter due to continued inventory digestion in the wired end market.
In the enterprise networking end market, revenue for the first quarter was $365 million, up 27% year-over-year and flat sequentially, which is better than initially anticipated. This positive surprise was triggered by a significant increase in custom ASICs. However, this growth was offset by a planned reduction in channel and customer inventory of merchant products. Looking ahead to the second quarter, the company projects a revenue decline of more than 10% sequentially in this segment due to inventory corrections.
In the automotive and industrial end market, revenue for the first quarter was $89 million, which was flat year-over-year but a decline of 10% sequentially. While the automotive business demonstrated strong growth both compared to the previous year and sequentially, this progress was offset by a decline in the industrial business. In the second quarter, the company expects revenue from the auto and industrial end market to grow sequentially.
Lastly, in the consumer end market, revenue for the first quarter was $142 million, which fell below expectations and represented a decline of 20% year-over-year and 21% sequentially. However, the company forecasts sequential revenue growth in the mid-30% range for the second quarter. This growth is expected due to strong seasonal demand and increased interest in custom SSD controllers. Additionally, growth is anticipated from Marvell’s HDD controllers as the company begins shipping closer to end-market consumption.
Exhibit 2: Q1 revenue by end market
A closer look at Marvell's Q1 financial performance suggests there was nothing to write home about, but the investor sentiment got a massive boost from the guidance for Q2 as the company projected sequential revenue growth for most of its key business segments. The biggest impact on Marvell stock came in the form of references to AI technology.
AI To Drive Future Growth
Marvell Technology has received a lot of attention from investors of late because of the increasing adoption of generative AI across various industries. This surge in AI usage has led to a higher demand for chips that power AI technology, which has benefited Marvell and a few other companies in this sector.
According to Marvell CEO Matt Murphy, AI has become one of the key applications within the cloud sector, leading to a dramatic increase in its importance and the resulting opportunities. Generative AI, in particular, is rapidly driving the development of new applications and influencing investment priorities for cloud customers. Generative AI is a technology that can create new content, such as text, images, or audio, based on the data it is trained on. These models learn the patterns and structure of their input data and then generate new data that has similar characteristics. For example, a generative AI model trained on a large amount of text can predict the next word in a sentence, or write a whole paragraph on a given topic. Generative AI has various applications, including creating artwork, enhancing virtual reality experiences, and even assisting in drug discovery. According to Market.us, the global market for generative AI in business will reach $20.9 billion by 2032, growing at a compounded annual growth rate of 33.5%. The implementation of AI workloads requires extensive datasets, emphasizing the need for robust and powerful infrastructure.
Exhibit 3: Generative AI in business
The architecture of AI data centers differs significantly from standard cloud infrastructure. AI relies on systems comprising multiple accelerators, such as GPUs, as the primary building blocks. These systems are interconnected to form large-scale AI clusters. The interconnectivity bandwidth required for AI data centers is significantly higher than that of standard cloud infrastructure.
Marvell recognizes AI as a strong growth driver for its PAM4 optical DSP platform. The company expects the demand for high-bandwidth optical interfaces to grow as AI clusters scale, allowing for increased connectivity over longer distances. Marvell's optical DSPs are versatile, compatible with various network protocols, and offer low-latency, high-capacity fabric switches.
The growing adoption of AI in cloud data centers has also increased the demand for Marvell's DCI (Data Center Interconnect) products. These products provide high-bandwidth, low-latency optical links for connecting regional data centers. Marvell's advancements in DCI include the industry's first pluggable module and the provision of 400 gigabits per second in its latest DCI product line.
The company is also witnessing strong demand for its networking solutions, driven by AI's impact on data centers. The company's low-latency, high-capacity switches are in high demand, particularly as the industry transitions from 12.8T to 51.2T switches, enabling a significant increase in network bandwidth. Marvell has strategically positioned itself to address both network connectivity and compute opportunities in the AI market. In AI data centers, accelerators like GPUs have become the primary compute engines, with CPUs used for control purposes. This fundamental shift presents a significant opportunity for Marvell's cloud-optimized silicon platform, with AI applications now representing the largest revenue driver.
The demand for Marvell's cloud-optimized design wins, including custom silicon products tailored for AI, is expected to exceed previous projections. The company anticipates substantial revenue growth from AI applications, with a projected CAGR of over 100% from fiscal 2023 to 2025. Marvell also foresees generative AI implementations, particularly in video and image processing, contributing to the growth of storage and exabyte capacity in both HDD and flash technologies. According to Gartner, by 2030, blockbuster films are anticipated to be released where approximately 90% of the film's content, ranging from text to video, will be generated by AI. This represents a substantial shift from the negligible AI-generated content seen in 2022. These predictions highlight the growing influence and potential of Artificial Intelligence in the realm of creativity and its increasing integration into various industries.
Exhibit 4: Generative AI use cases by industry
Marvell is strategically well-positioned to play an important role in the adoption of AI technology. This will drive the earnings growth of the company while helping it attract premium valuation multiples in the market given how Mr. Market is continuing to reward companies that have a part to play in the rise of AI.
Marvell Stock Is Likely To Take A Breather
Marvell, at a forward P/E of around 40 , is not cheaply valued. However, this alone is not a good enough reason for investors to avoid MRVL as expensively valued companies can continue to get even more expensive when industry trends support better-than-expected earnings growth. What is concerning, however, is that EPS revisions are trending lower for the next fiscal year, which suggests analysts might have overestimated AI's potential impact on Marvell's foreseeable earnings. In the last 90 days, fiscal 2024 EPS estimates have been slashed a staggering 26 times.
Exhibit 5: EPS revision trends
I believe MRVL stock will lose some of the momentum that we have seen in the last month as analysts continue to take a cautious approach toward expected earnings.
Takeaway
Marvell is gaining significant traction with its commitment to AI-driven advancements. The company anticipates that its annual revenue related to AI will at least double in fiscal 2024, showcasing the significant potential for growth in this area. This strong focus on AI aligns with the industry's trends and positions Marvell as a key player in the AI market. Although long-term prospects seem bright, I am inclined to wait for a better opportunity to invest in the company as my earnings events-based investment strategy suggests MRVL will lose momentum in the future.
For further details see:
Marvell Technology: It's Time For A Breather