Marvell Technology (MRVL), a semiconductor stock, is generating buzz due to its impressive data center revenue growth. While the stock has performed well over the past 52 weeks, it has underperformed its sector. Despite this, three Wall Street analysts have recently updated their price targets, suggesting a strong upside potential for Marvell. The average of these targets from Evercore ISI, KeyBanc, and Rosenblatt implies a 27% upside for the stock. But where does Marvell stand within the semiconductor industry, and what are its primary revenue sources and growth drivers?
To answer these questions, let’s delve into Marvell’s annual report and its recent quarterly releases. Marvell, like Nvidia, is a fabless chip designer, meaning it designs chips but outsources their manufacturing. The company serves five major end markets: data centers, enterprise networking, carrier infrastructure, consumer, and automotive/industrial. In 2023, the data center market accounted for 40% of Marvell’s revenue. However, in the first quarter of 2024, this figure surged to 70%. This increase in data center revenue share mirrors the success of Nvidia, sparking investor interest. However, a closer look reveals a mixed picture. While data center revenue grew 87% from the fourth quarter of 2023 and 7% from the previous quarter, every other segment experienced a substantial decline. Total revenue dropped 19% from the previous quarter, primarily due to a 71% decrease in consumer revenue, a 58% decrease in carrier revenue, and a 42% decrease in networking revenue. Therefore, the rapid growth in the data center segment’s share of revenue was not solely driven by exceptional growth but also by the decline in other segments.
Despite this, Marvell exceeded adjusted earnings per share (EPS) and revenue expectations in its second-quarter financial results. Data center revenue increased 92% year-over-year and 8% sequentially. Although all other segments, except carrier infrastructure, experienced a quarterly decline, the company anticipates growth across all segments in the next quarter.
Marvell’s success hinges on its expertise in application-specific integrated circuits (ASICs), which it refers to as “accelerated custom compute.” The company predicts a 45% compound annual growth rate for this product type through 2025. ASICs are designed to excel in specific tasks, typically for specific customers. This key differentiator sets them apart from Nvidia’s GPUs, which offer versatility but lack the efficiency of ASICs. ASICs’ energy efficiency is crucial as AI demand grows, leading to a surge in electricity consumption. Data center electricity demand is projected to double between 2022 and 2026. While ASICs require significant upfront costs for design, their lower per-unit cost after design makes them attractive for hyperscaler companies, who need to purchase in bulk.
However, Marvell faces stiff competition from chip giant Broadcom (AVGO) in the ASIC space. Broadcom’s data center revenue grew 44% year-over-year in Q2, though significantly slower than Marvell’s data center growth. Broadcom enjoys several advantages, including an overall revenue growth of 43% in Q2 compared to Marvell’s 5% decline. Marvell is only profitable on an adjusted basis, while Broadcom generated over $2 billion in net income last quarter. Additionally, Broadcom’s forward price-to-earnings ratio of 29 is significantly lower than Marvell’s of 42. These factors suggest that Broadcom may be a more appealing investment option for investors seeking to capitalize on the potential of application-specific integrated circuits.
