Shares of Marvell Technology (MRVL -4.13%) have been clobbered in the market over the past year, losing 45% of their value, and the company's earnings report for its fiscal 2023 fourth quarter (ended Jan. 28, 2023) didn't do much to lift investor sentiment when it was released on March 2.
The chipmaker, which supplies networking, storage, and computer chips to multiple industries such as data centers, automotive, carrier infrastructure, and enterprise networking, failed to top its better-than-expected quarterly results with healthy guidance.
But a closer look at the comments made by Marvell management on the March earnings conference call suggests that the company is on track to win big from the growing proliferation of artificial intelligence (AI) applications.
Marvell Technology is facing short-term headwinds
Marvell's fiscal Q4 revenue increased 6% year over year to $1.42 billion, edging past the $1.4 billion consensus estimate. The company's non-GAAP (generally accepted accounting principles) earnings dropped to $0.46 per share last quarter, in line with analysts' expectations but down from the prior-year period's reading of $0.50 per share. The mixed results can be attributed to the weak demand for Marvell's chips, especially in the storage and data center markets.
And now, Marvell sees the inventory corrections arising out of weak chip demand spreading to more areas of its business. This explains why the company has issued a weak forecast for the first quarter of fiscal 2024, anticipating $1.3 billion in revenue in the current quarter, which would be a 10% drop over the prior year.
Additionally, analysts aren't expecting a turnaround in Marvell's fortunes in fiscal 2024 as they expect its revenue to fall 7% to $5.5 billion. Its adjusted earnings are forecast to contract by 28% to $1.52 per share. So near-term prospects aren't in the best shape now as the oversupply of chips in key markets such as storage is impacting demand for its chips, while a slowdown in data center spending means that Marvell's design wins will go into production later than expected.
However, Marvell is expected to clock healthy double-digit revenue growth from fiscal 2025.
MRVL Revenue Estimates for Current Fiscal Year data by YCharts
That won't be surprising, as Marvell serves fast-growing areas such as 5G networks, cloud computing, and automotive. Moreover, a boom in AI adoption could turn out to be another massive catalyst for the company.
A big growth driver that could lead to a turnaround
Marvell CEO Matt Murphy said on the March earnings conference call that the company expects "generative AI to drive a massive transformation in data center architecture." Murphy also added that generative AI applications will create the need for high-speed connectivity chips that can rapidly transfer data while keeping energy consumption low.
The good part is that this need for high-speed connectivity in data centers created by AI is already driving growth for Marvell's pulse amplitude modulation 4 (PAM4) digital signal processor (DSP) optical connectivity solutions. According to Murphy:
Last year, we launched the industry's first 800-gig PAM DSP and saw a huge ramp, driven almost exclusively by AI applications. Our PAM DSP revenue from AI in fiscal 2023 more than quadrupled from the prior year. As AI models continue to grow in complexity, we expect that they will require more and more low-latency bandwidth.
And now, Marvell is stepping up its game in optical connectivity with a new PAM platform that will deliver double the bandwidth in AI clusters. All this indicates that Marvell is setting itself up to capture a nice chunk of the optical interconnect market that's expected to clock nearly $36 billion in annual revenue by 2030, as compared to $11.6 billion in 2021.
Throw in Marvell's catalysts in other markets, and it is easy to see why analysts are expecting the company to deliver annual earnings growth of over 17% for the next five years. So, investors may want to add this semiconductor stock to their watch list, as it could benefit from multiple growth drivers, including AI, and consider buying it when it becomes available at a cheaper valuation.
Marvell currently has a price-to-sales ratio of 5.8, which is expensive when compared to the S&P 500's multiple of 2.4. The headwinds discussed here could put pressure on the stock in the short run, and that's when savvy investors may want to start accumulating Marvell Technology thanks to its solid long-term prospects.
