Assessing Marvell Technology's Investment Strategy: Buy, Sell, or Maintain?
Marvell Technology (MRVL), a semiconductor company, had an impressive 83% growth in 2023, majorly due to its booming artificial intelligence (AI) chip business. This sector emulates Broadcom's (AVGO) portfolio, encompassing application-specific integrated chips (ASICs) used by cloud giants to develop custom AI accelerators, networking chips, and digital signal processors for AI data centers.
Although the non-AI segments of Marvell's business have been on a downward spiral, its AI chip division is thriving. Investors have bid up the stock to a lofty valuation, given this growth. However, the question remains – is it a buy, sell, or hold for the upcoming year?
The Case for Buying Marvell Now
Similar to Broadcom, Marvell produces standardized IP blocks that cloud giants utilize to expedite their own custom ASIC design. As Nvidia charges high prices for its GPUs, cloud providers are increasingly investing in personalized semiconductors.
Broadcom's ASIC business might be more extensive, but Marvell has Amazon (AMZN) as a valuable customer. Amazon's substantial investments in homegrown chips further benefits Marvell, with the tech giant reportedly agreeing to train its new language models on Marvell's Trainium chips instead of Nvidia GPUs.
While customer concentration is a concern for any company, Marvell and Amazon recently sealed a five-year collaboration agreement for AI data centers, ethernet, and PCIe equipment. This lengthy deal offers security and provides long-term visibility, which is beneficial for Marvell.
Additionally, Marvell's innovation engine continues to churn out groundbreaking developments. In December 2023, the company introduced a new custom high-bandwidth memory (HBM) interface technology, enabling faster and more efficient processing. This innovation addresses the HBM bottleneck, which has been a significant hurdle for AI training and inferencing.
Lastly, Marvell's Q3 performance demonstrated exceptional growth in the data center segment (a whopping 98% growth, to be precise), with this sector now making up 72.6% of overall revenue. This transformation from a cyclical chip business to a high-growth AI franchise is commendable.
However, Valuation Remains a Concern
The Marvell story is compelling, especially as cloud providers show increasing interest in customizing their ASIC footprint. But there is a vast amount of optimism priced into the stock at this point. Marvell currently trades at 43 times next year's earnings estimates – a considerable multiple.
While a high multiple isn't necessarily a sign of overvaluation, investors must weigh the potential AI opportunity. Based on Marvell's April 2023 AI Day presentation, the company identified an addressable market for custom silicon ASICs, switching, interconnect, and storage controller chips, which is projected to rise from $21 billion in 2023 to $75 billion by 2028. Marvell also aims to capture a 20% market share by that time.
If Marvell meets its targets, it could rake in $15 billion in data center revenue by 2028, up from a $4.4 billion run-rate today. After accounting for non-AI segments' growth to $4 billion by 2028, Marvell's total revenue would be around $19 billion.
Assuming Marvell maintains a 30% adjusted operating margin, this would result in $5.7 billion in operating earnings and just under $5 billion in net income in 2028. Given Marvell's current market cap of over $100 billion, investors are essentially paying over 20 times 2028 earnings. This seems like a hefty premium to pay for earnings that are four years in the future, considering the ongoing uncertainties in the fast-moving sphere.
But it May Be a Reasonable Price After All
Marvell's valuation could be justified if its AI outlook has improved since its April 2023 presentation. After all, Broadcom recently stated that its own AI total addressable market had grown to between $60 billion and $90 billion for its current clients by 2027. If Marvell's outlook took competitors like Broadcom into account, the ASIC and AI networking market might have improved since then.
Therefore, while Marvell might not be the best buy right now, it may not be an outright sell either. As long as the AI market continues to flourish, Marvell appears to be a hold in 2025.
However, if any indications of a AI infrastructure buildout slowdown emerge, investors should brace themselves for a potential pullback. For those who don't already own shares, it might be advisable to put Marvell on the watchlist, waiting for a more appealing price before jumping in.
Enrichment data:
Overall:
Marvell Technology (MRVL) has an optimistic outlook in the 2025 market, mostly driven by its remarkable growth in the AI chip sector. Here are the key points to consider:
AI Chip Business Growth
- Market Demand: The global AI chip market is expected to witness significant expansion, projected to reach $927 billion by 2034, with a compound annual growth rate (CAGR) of 28.90%[1].
- Custom Silicon: Marvell's focus on custom silicon AI solutions is promising, as these chips deliver cost-efficiency and task-specific performance[1].
- Partnerships: The company has entered into strategic partnerships to power their progress, such as the five-year contract with Amazon[2].
Revenue Projections
- Revenue Growth: Marvell's revenue is projected to expand, with data center revenue increasing significantly to around $1.1 billion in Q3 of fiscal 2025[3].
- Data Center Dominance: The data center segment accounted for 73% of Marvell's Q3 revenues, demonstrating outstanding growth and dominance in this sector[2].
Valuation and Risks
- High Valuation: Marvell is trading at a premium valuation, with a P/E ratio of 80x and an EV/EBITDA ratio of 89x, which is higher than its competitors[1].
- Risk Factors: The company faces challenges related to its dependence on China, although it is actively addressing this issue through strategic partnerships[2].
- Strategic Alliances: The success of Marvell depends on its ability to maintain and expand strategic alliances, which could face challenges in the event of difficulties in those partnerships[2].
Investment Advice
- Potential for Growth: Despite its high valuation, Marvell has significant growth potential in the AI chip market, which is projected to see substantial expansion[1][2].
- Long-Term Projections: Analysts predict that Marvell could capture a substantial share of the custom silicon AI market, aiming to reach an annual $8 billion by 2025, up from the current $1 billion[1].
- Market Sentiments: The market sentiment around Marvell remains bullish, with several analysts updating their price targets to reflect predicted substantial growth in AI-linked revenue streams[4].
Conclusion
Marvell Technology represents a captivating investment opportunity in 2025, driven by its impressive growth in the AI chip sector and strategic partnerships. However, investors should remain aware of the high valuation and potential risks, primarily relating to market volatility and dependencies on key partnerships. The company's ability to manage these challenges and execute on its plans will play a crucial role in its future success.
Marvell's focus on investing in its AI chip division has led to a significant increase in its stock valuation, reflecting the market's confidence in its growth potential. The company's innovative custom high-bandwidth memory (HBM) interface technology could help address the HBM bottleneck, improving AI training and inferencing efficiency.
Marvell's AI chip business is heavily reliant on its collaboration with Amazon, which has agreed to use Marvell's Trainium chips for training new language models instead of Nvidia GPUs. This partnership, spanning five years, offers long-term security and visibility, benefiting Marvell's overall financial performance.
Although Marvell's valuation appears high, considering its current market cap and future earnings estimates, some analysts argue that it could be justified if the company's AI outlook has improved since its April 2023 presentation. Marvell's ambitious goal of capturing a 20% market share in the custom silicon AI market by 2028, if achieved, could significantly boost its revenue.
Considering the vast potential of the AI chip market, which is projected to reach $927 billion by 2034, investors may view Marvell as a reasonable investment opportunity, even with its high valuation. However, the company's dependence on key partnerships and potential market volatility warrant careful consideration.
