Marvell is one of the earliest semiconductor stocks we’ve covered on our site, dating back to November of 2019 when we first covered application-specific integrated circuits (ASICs), commonly known as custom slicing. Despite having a clear AI story, Marvell has lagged other AI stocks over the past year:
Our last position in Marvell was bought at $56.90 in June of 2023 and closed at $77.19 in March of 2024. Not bad, but not great. At the time of closing the stock, it was becoming clear that Broadcom was the stronger near-term story when my last analysis stated: “As I left the Marvell call and moved along to join the Broadcom earnings call, there is no doubt which company is stronger right-here, right-now. It’s Broadcom. Marvell has a strong product story but it’s in a sea of AI whales that are ramping quickly.”
Despite closing Marvell, the stock remains on the list of our top 10 ideas. There is abundant AI potential buried by other segments that are in a steep, cyclical trough. As we look on the horizon, CY2025 has the makings of a solid comeback for this often-overlooked AI stock.
Marvell’s Fiscal Q1 2025 Financials:
For fiscal Q1 ending in April, Marvell reported revenue growth of (-12.2%) for revenue of $1.16 billion. This marginally missed estimates by (-0.1%). The revenue growth is the lowest since we’ve tracked the stock, dating back to 2021. According to analyst consensus, this should mark the bottom with sequential growth of 8% next quarter.
For fiscal Q2 ending in July, management guided revenue of $1.25 billion, at the midpoint, representing a decline of (-6.8%). According to consensus, this will be the first quarter to report sequential growth of 7.8%, and the sequential growth is expected to continue.
Here is some more information on the rebound that is materializing:
- Fiscal Q3 ending in October is expected to report (-0.9%) YoY for $1.41 billion, which will represent QoQ growth of 12.8%.
- Fiscal Q4 ending in January is expected to report 11.3% YoY for $1.59 billion, which will represent QoQ growth of 12.7%
- Fiscal Q1 ending in April is expected to report 39.76% YoY for $1.62 billion, which will represent QoQ growth of 1.9%.
When looking on a fiscal year basis, it’s easy to see that Marvell’s stock is struggling due to cyclical segments. This is not unique to Marvell as the recovery in consumer electronics, automotive, and telecom has taken longer than anticipated. As a reminder, these segments surged during the pandemic and during a long period of quantitative easing. Now, semiconductor companies are collectively weathering a deep trough that began in CY2022.
For FY2025 ending in January, analyst consensus is for (-1.88%) on revenue of $5.4 billion – yet, twelve months ago, FY2025 estimates were for growth of 17.8% for revenue of $8.40 billion. What’s interesting is that AI is doing better than expected, and it’s the other segments that created the twelve-month disparity.
For FY2026, the estimates have gone up but not due to higher revenue, rather due to lower comps. The growth rate of 32.6% for FY2026 is expected on revenue of $7.17 billion. This is a bit lower than the $7.52 billion expected for this fiscal year twelve months ago.
What this situation represents is a lack of confidence in both management’s tone and analysts’ financial modeling in predicting when consumer-driven segments will see a sustained recovery.
Marvell is not GAAP profitable due to recent acquisitions and the related costs, and also stock-based compensation sits at 11% of revenue.
In the most recent quarter, the company reported GAAP EPS of ($-0.22) which missed estimates of (-$0.25). Adjusted EPS of $0.24 was in line. According to analyst estimates, this is expected to be the bottom with sequential growth beginning in the July quarter.
For the upcoming quarter ending in July, the company is expected to report adjusted EPS of $0.30, representing a YoY decline of (-9.78%).
Here is what the rebound looks like on the bottom line. We can reasonably assume Marvell will be GAAP profitable again sometime during FY2026. Notably, this depends on the other segments as growth in AI accelerators (custom silicon) weighs on margins.
On a fiscal year basis, Marvell is expected to see the following:
- FY2025E adjusted GAAP EPS of $1.40 for a decline of (-7.5%)
- FY2026E adjusted GAAP EPS of $2.46 for growth of 76%
- FY2027E adjusted GAAP EPS of $3.33 for growth of 35%
Key Segments:
For the past two quarters, the data center has been growing rapidly, and has reached a historical high. This is notable given Marvell completed a large data center-focused acquisition a few years back (Inphi) which provided immediate, accretive data center revenue.
Data center revenue in the current quarter was $816.4 million, up 87% YoY and up 7% QoQ. This is on the heels of another historic data center quarter of $765.3 million, up 54% YoY and up 38% QoQ. The data center outperformance comes from electro-optics and interconnect products, whereas custom silicon saw “initial shipments” in the quarter. Looking to next quarter, management expects data center to grow in the mid-single digits “as our custom AI silicon continues ramping.” It was mentioned on the call that optical interconnects are up against a tough comp, and thus, will be flat QoQ but will still perform well YoY.
“I'd say in the short-term, the way to think about the optical business into July is we're modeling it right now and our guide is flattish to slightly up. And the reason for that is we outperformed pretty big both in Q4 and Q1. […] So as we look into July, we're modeling it to be flat to slightly up, it may do better, let’s see order trend come in. But year-over-year will be very strong because also in the second half to your point, those traditional standard cloud infrastructure build-outs and upgrades are going to happen.”
Of this, the company is expected to exit the year with a minimum of $1.5 billion in AI revenue in FY2025. About a year ago, we had published that Marvell was on track to report 14.4% in AI revenue when the company doubled its AI expectations to $800 million, up from $400 million.
With the current update of $1.5 billion provided in April at the AI Investor Day, the company is now on track to report 27.8% in AI revenue. Per management comments, the $1.5 billion is a “floor” and there was discussions in the Q&A on the likelihood the FY2025 exit rate will be higher in the next few months.
Brace yourself, however, as the other segments are deep in the red:
- Carrier infrastructure was down (75%) YoY and down (58%) QoQ for $72 million. Carrier infrastructure is expected to be flat sequentially next quarter. According to commentary, the recovery in this segment is harder to predict than the others. The company is shipping a new 5nm DPU product next year that is expected to help expand 5G market share.
- Enterprise networking was down (58%) YoY and down (42%) QoQ for $153 million. Enterprise networking is also expected to be flat sequentially. The recovery is expected to begin in the second half of this fiscal year.
- Consumer was down (70%) YoY and down (71%) QoQ for $42 million. This segment has been weighed down from a soft gaming market, yet Marvell’s primary customer is expected to rebound and the segment is expected to double on a sequential basis.
- Automotive was down (13%) and down (6%) QoQ for $78 million. This segment is expected to be flat sequentially yet will resume growth in the second half of the fiscal year.
Margins:
- Gross margin in the current quarter of 45.5% is low and there were questions on the call about this (see below). Ultimately, the AI story weighs on Marvell’s gross margins but does not affect the operating margin. The guide for next quarter is gross margin of 46.2%. This will represent gross profits of $577.5 million.
- Adjusted gross margin of 62.4% in the most recent quarter with a guide of 62% next quarter is low compared to the historic adjusted gross margin in the 65% range. Next quarter, adjusted gross profits are expected to be $775 million.
- GAAP operating margin last quarter was (13.1%) and this is certainly a blemish in the report. Next quarter, GAAP operating margin is expected to be (8.8%) for a GAAP operating loss of $110.5 million.
- Adjusted operating margin of 23.3% last quarter is lower than the historic adjusted OPM in the mid-30% range. Adjusted operating margin in the upcoming quarter is expected to be 25.6% for adjusted operating profit of $320 million.
- Net margin last quarter was (18.6%) and adjusted net margin was 17.8% for adjusted net profits of $206.7 million.
Cash Flow:
Cash flow for Marvell is decent yet the debt-to-equity ratio is high.
In the most recent quarter, the operating cash flow was $324.5 million for a margin of 28%. The free cash flow was $232.5 million, for a margin of 20%. This is lower than usual due to annual employee cash bonuses. Inventory was $826 million, decreasing $38 million from the prior quarter. On a year-over-year basis, inventory has been reduced by $200 million or 20%. Days sales outstanding decreased 8 days to 69 days.
The company has $847.7 million in cash on the balance sheet and has $4.15 billion in debt. The company’s net debt to EBITDA ratio is 1.8X and the gross debt to EBITDA ratio is 2.27X.
In the recent quarter, the company returned $52 million to shareholders through cash dividends. The company also repurchased $150 million of our stock during the first quarter, an increase of $50 million from the prior quarter with expectations to increase repurchases in Q2.
Quick refresher on Marvell’s Products:
Marvell offers 200-gig, 400-gig and 800-gig PAM-based electro-optics. The 800-gig is the primary interconnect for AI deployments. The company is qualifying a 1.6T solution with 200-gig per lane for the next leg up in AI acceleration. For the 1.6T solution, Nvidia will be a lead partner. Here’s a video on Marvell and Nvidia’s partnership on optical interconnects.
Electro-optics help to increase data rates and has replaced NRZ data transmission due to doubling the bit rate. Hyperscalers require high bandwidth and port density. PAM4 connects networking ASICs and machines, like servers and AI machines. Digital-based PAM4 uses analog-to-digital converters to clean up the signal in the digital domain before converting it back to analog to transmit.
Artificial intelligence and machine learning drive demand for the 800-gig PAM to increase the speed of input-output and to process the data flows. This doubles the throughput (bandwidth) due to an 8x100Gpbs optical transceiver for inside and between AI clusters.
In the most recent earnings call, Marvell discussed their plans to compete in the PCIe Gen 6 retimer interconnect market. PCIe 6.0 will be the first to use PAM4 signaling technology. Marvell is sampling eight and 16 lane PCIe 6.0 retimers with customers, which will help data center compute fabrics scale. Per management: “AI applications are driving data flows and connections inside server systems at significantly higher bandwidth, driving the need for PCIe retimers to meet the required connection distances at the faster speeds.”
Marvell also offers data center interconnect (DCI) products, which connects data centers over various distances to transfer data, content and critical assets. COLORZ silicon photonics increase the speed of data movement while keeping power and cost low. The 400 gig ZR and 800 gig DCI products with coherent DSP (digital signal processor) extends the reach to 1,000 kilometers.
Teralynx are ethernet switches with the 800 Gb/sec Teralynx 10 built for cloud data center and AI fabrics. The company also provides Ethernet controllers and PHY transceivers, and is a competitor to Broadcom on switch ASICs in that regard. Teralynx and Broadcom’s Tomahawk will be in lock-step for the release of 1.6Tb switch ASICs.
Custom silicon refers to ASICs or application-specific integrated circuits that are customized to be “application-specific” with the benefit of becoming cheaper with volume production. ASICs are expensive at the onset, yet become cheaper with volume production. Custom silicon is attractive to Big Tech as cash is not an issue with these companies for ASICs very high startup costs (well into the millions). Big Tech also immensely popular applications to justify the non-recurring engineer (NRE) costs in developing chips for a specific purpose.
Across ASICs, the most well-known is Google’s tensor processing unit (TPU). Yet, there is a vast array of custom silicon that has hit the market since TPUs were first introduced in 2016 for the TensorFlow framework. Amazon was second to diversify with custom silicon for AI workloads with Graviton and Inferentia in 2018, and the more recent Trainium announced in 2020. Last year, Microsoft announced the 5nm Maia 100 AI chip to reduce dependency on data center GPUs, and a Cobalt 100 Arm-based CPU to increase the performance on Azure-based virtual machines for scaling web applications, microservices and open-source databases. We covered in our 2019 Marvell analysis that Microsoft was pursuing FPGAs (Xilinx), but FPGAs have now been replaced with ASICs, which is what Marvell and Broadcom offer.
Discussions on AI Revenue:
Naturally, there were questions on the guidance for $1.5 billion in AI revenue exiting the fiscal year. Regarding the current quarter, one analyst is modeling for $500 million per quarter in AI revenue.
When pressed, management hinted this is the minimum number to work with: “And then, the whole thing in flex meaningfully in the second half and I'd say from a full year perspective, the way to think about it, maybe some additional color would be, we talked about a floor of $1.5 billion for AI revenue for Marvell for this fiscal year with about two-third in electro-optics and a third in custom. . And we see now both of those exceeding that number.”
Where the market could get excited is if Marvell’s custom silicon surprises to the upside. As of now, it’s expected to contribute one-third of the $1.5 billion quoted above next year. Marvell’s custom AI silicon business is beginning to ramp and investors will see more evidence of this in the second half of this year. Per the opening remarks: “Our custom compute AI programs are beginning to shift in the first half of this fiscal year and we are expecting a very substantial ramp in the second half of this year, followed by a full year of high volume production in fiscal 2026.”
The market for custom silicon is expected to grow from $7 billion in CY2023 to $40 billion in CY2028 at a 45% CAGR. My comment is that this is probably too low; as the market is too nascent to accurately predict a higher number.
Outside of custom silicon, Marvell’s management expects the aggregated data center opportunity to grow at a CAGR of 29% from $21 billion to $75 billion. There was a comment that management predicts they will double their market share from 10% to 20%: “We see a massive opportunity ahead with the data center TAM expected to grow from $21 billion last year to $75 billion in calendar 2028 at a 29% CAGR, we have numerous opportunities across compute, interconnect, switching and storage, as a result, we expect to double our market share over the next several years from our approximately 10% share last fiscal year.”
That’s quite a statement as it implies Marvell’s data center segment will grow from $3.2 billion today to $15 billion in the next several years. Given they tied the statement to the 2028 projection, then this implies a 368% growth rate on the data center segment over the next 4 years.
Notably, the statement was repeated in the Q&A: “So we articulated the AI day, a very robust custom silicon TAM in excess of $40 billion going out into 2028 time frame and that TAM growing very significantly. And yes, we — I think your numbers are about right in terms of the share. We're going to end up with near-term and then Raghib articulated our goal to drive that in the custom silicon area to 20%. So you got to draw a line kind of from here to there in terms of the opportunity.”
Looking forward, management stated the floor for next fiscal year on AI revenue is $2.5 billion, up from the $1.5 billion, as custom silicon is expected to see its first full year of volume.
On the topic of custom silicon expanding next year, this will weigh on the gross margin, yet it will help to drive a strong operating margin, primarily due to non-recurring engineering costs.
Conclusion:
We have another attempt at Marvell in the works, and we are looking closely at timing. On one hand, we may be too early and have to deal with a couple of earnings reports that are duds until we get to the rebound in 2025. On the other hand, Marvell may start to move quicker than current consensus is forecasting as it’s participating in a few explosive trends.
How the market perceives the non-AI segments until we get a material recovery in these segments is anyone’s guess. In a risk-on environment, these segments will be dismissed and the number of times a management team mentions the words “AI” on an earnings call is all that matters. In a risk-off environment, Marvell’s unfortunate exposure to telecom and gaming will mute the upside.
To put it simply, we are cautiously optimistic on Marvell. Over the next few months, we plan to revisit if we see a break above $79.
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