Why Analysts Are Bullish on Marvell Despite Sector Weakness

Marvell Technology MRVL is a semiconductor stock gaining hype due to its fast data center revenue growth. It has performed well over the past 52 weeks but is underperforming in its sector. The stock is up 36%, while the Invesco PHLX Semiconductor ETF SOXQ is up 44%. The fund tracks the PHLX Semiconductor Index, a commonly used barometer of the industry's performance.

Three Wall Street analysts who recently updated their price targets see a solid upside in the stock. The average of Evercore ISI, KeyBanc, and Rosenblatt's price targets implies an upside of 27%.

So, where exactly does Marvell fit within the industry, and what are its main sources of revenue and growth? We'll answer those questions by diving into the firm's annual report and its past two quarterly releases. I'll close by detailing Marvell's place in one particularly important market.

Data Center Business is Booming, but Other Segments Are Suffering

Marvell is a fabless chip designer like Nvidia. This means it designs its chips but doesn't manufacture them. Marvell Technologies serves five large end markets: data center, enterprise networking, carrier infrastructure, consumer, and automotive/industrial. The data center market made up 40% of the company's revenues in 2023. However, in Q1 of 2024, that number jumped to 70%.

Enterprise networking, which provides products for companies to connect and share their data between different devices, accounted for 22% of total revenue in 2023. Carrier infrastructure, which works with cell phone companies to support 5G mobile networks, made up 19% of revenues.

Investors' ears might perk up when they hear that the company's share of data center revenue compared to its total spiked in Q1, as this has been a big driver of success for Nvidia. However, this increase wasn't for a great reason.

Data center revenues grew 87% from calendar Q4 2023 and 7% from the prior quarter. However, every other segment of the business saw a dramatic decline. On a quarterly basis, total revenue fell 19% from the previous quarter, led by a 71% decrease in consumer revenue, a 58% decrease in carrier revenue, and a 42% decrease in networking revenue.

So, the rapid growth in the data center segment's overall share of revenue wasn't because it grew incredibly fast; it was because every other segment had declined.

Marvell beat adjusted earnings per share (EPS) and revenue moderately in its Q2 financial results. Its guidance on both those measures also came in above expectations. Data center revenue increased 92% from the previous year and 8% from the previous quarter.

All other segments except carrier infrastructure fell quarterly. However, the firm expects all the segments to grow again next quarter.

Marvell's Big Opportunity in Custom Computing

Just because growth in data center revenue share is a bit misleading without looking into the numbers closely, it doesn't mean the company won't succeed. One significant value proposition Marvell has is its expertise in application-specific integrated circuits (ASICs). Marvell calls these products "accelerated custom compute" and sees a 45% compound annual growth rate in that product type through the calendar year 2025.

ASICs are made to do a specific task, typically for a specific customer, extremely well. This big differentiator sets them apart from Nvidia's main GPU chips, which can do many tasks but are less efficient.

ASICs' efficiency allows them to use much less energy than GPUs. As AI demand grows, power efficiency is crucial. AI demand is set to cause electricity demand to surge. Annual electricity demand from data centers is expected to double in just four years, from 2022 to 2026.

ASICs have high upfront costs as designers must tailor them to very specific uses. However, they offer much lower per-unit costs after the design. So, they suit hyperscaler companies over the long term who need to buy in bulk.

Marvell's Biggest Challenger Shows Relative Strengths

However, Marvell has a big problem; it shares the ASIC space with chip giant Broadcom AVGO. Broadcom's data center revenue grew 44% in Q2 from last year's quarter. Although this is significantly slower than Marvell's data center growth, Broadcom has other advantages.

Overall revenue grew 43% in Q2, compared to Marvell's 5% decline. Marvell is also only profitable on an adjusted basis. Meanwhile, Broadcom brought in over $2 billion in net income last quarter. Lastly, Broadcom's forward price-to-earnings ratio of 29 is much lower than Marvell's of 42.

Broadcom may be a preferable stock when looking to capitalize on the potential of application-specific integrated circuits.

The article "Why Analysts Are Bullish on Marvell Despite Sector Weakness" first appeared on MarketBeat.