After a solid rally in 2023 and a hot start to 2024, shares of chip designer Marvell Technology Group (NASDAQ: MRVL) have failed to participate in the artificial intelligence (AI) chip stock surge this year. It’s a confounding situation, because Marvell has many of the pieces in place to rival one of the top semiconductor stocks right now, Broadcom (NASDAQ: AVGO).
Is there something wrong with Marvell? And can management get the stock back into gear soon?
Marvell’s AI boom gets diluted — again
These days, thanks to a number of acquisitions the last few years, Marvell earns the bulk of its chip design revenue from data center customers. In fact, about 70% of revenue in its fiscal first quarter of 2025 (the three months ended in April) was categorized as “data center” sales. That includes from big data center operators (like the “Magnificent Seven”) that may want to customize some of their own chips and hire Marvell for some help, or from companies that build data center servers (like Dell or Super Micro Computer).
In this bull market where all things AI are seemingly keeping the economy afloat, this bent toward data centers is a good thing. The segment, which includes AI-specific products, increased an impressive 87% year over year last quarter.
There’s just one problem: Marvell is diversified, and the rest of its revenue segments have been in steep decline for close to two years, thanks to the nasty bear market following the height of the pandemic.
|
Marvell Technology Group Segment |
Q1 Fiscal 2025 Revenue |
Increase (Decrease) YOY |
Q2 Fiscal 2025 Expectations QOQ |
|---|---|---|---|
|
Data center |
$816 million |
87% |
Mid-single-digit % increase |
|
Enterprise (non-data center and cloud) |
$153 million |
(58%) |
Flat |
|
Mobile carriers (5G networks and other) |
$71.8 million |
(75%) |
Flat |
|
Consumer markets |
$42 million |
(70%) |
100% increase |
|
Automotive and industrial |
$77.6 million |
(13%) |
Flat |
|
Total |
$1.16 billion |
(12%) |
$1.25 billion, up 8% QOQ, down 7% YOY |
Data source: Marvell Technology Group. YOY = year over year. QOQ = quarter over quarter.
The result of this diversified product and end-market chip offering is that Marvell’s overall sales actually fell once again last quarter, down 12% year over year. And in spite of ongoing AI product strength, revenue is expected to fall once more in Q2 by 7% year over year — although the good news is it appears Marvell is returning to sequential growth.
Also, because of the multiple acquisitions to reposition toward data centers and AI, Marvell remains unprofitable on a generally accepted accounting principles (GAAP) basis (due to noncash amortization expense of past acquisitions), although free cash flow remains in healthy positive territory.
Is it time to sell the stock?
As of this writing, Marvell traded for 53 times trailing-12-month free cash flow. That’s actually a higher premium than its bigger peer, Broadcom (39 times free cash flow), which has managed to stay in growth mode throughout the bear market of the last two years, and is highly profitable to boot.
Granted, there are some green shoots for Marvell. It’s too soon to say for sure, but commentary from management and most other executives in the chip industry indicate they expect overall semiconductor sales to finally recover starting the back half of 2024. This could mean Marvell’s declining end markets may finally join AI in the bull market party. The valuation could improve dramatically as a result as Marvell’s profits make a comeback.
Nevertheless, after holding Marvell stock for close to six years, I’ve decided to consolidate my holding into Broadcom. I’ve owned Broadcom for even longer, and it has dramatically outperformed Marvell. My theory that a smaller competitor might be able to steal some of the design giant’s thunder was misplaced. Broadcom is a leader for a reason, and I believe is well positioned to benefit the most from the AI infrastructure race.
I understand picking winners and losers is highly problematic, so there are a couple of alternatives that can yield an investor some exposure to both Marvell and Broadcom: the broad tech fund (software and hardware and everything in between) Vanguard Information Technology ETF (NYSEMKT: VGT), or the iShares Semiconductor ETF (NASDAQ: SOXX) for a focus on just chip stocks.
Check out those two exchange-traded funds if you’d rather not choose which semiconductor companies will fare the best in the years ahead.
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Nicholas Rossolillo and his clients have positions in Broadcom and Vanguard World Fund-Vanguard Information Technology ETF. The Motley Fool has positions in and recommends iShares Trust-iShares Semiconductor ETF. The Motley Fool recommends Broadcom and Marvell Technology. The Motley Fool has a disclosure policy.
1 Top Chip Stock Reporting Massive AI Growth — Why Isn’t the Stock Rising? was originally published by The Motley Fool
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