Tech companies facilitating artificial intelligence technology (AI) have risen to prominence over the past year. Among these is Marvell Technology (MRVL 3.17%), which saw its stock hit a 52-week high of $85.76 on March 7, just before the company announced earnings results for its fiscal fourth quarter, which ended Feb. 3.
The run-up before earnings was thanks in part to investor enthusiasm for AI. Marvell is seen as one of the enablers of this technology through the hardware it provides to data centers housing AI systems. The AI market is expected to expand from $306 billion in 2024 to $739 billion by 2030. Given the size and growth of this industry, should you purchase Marvell shares?
The answer isn't straightforward, as suggested by Marvell's stock price drop after its fiscal Q4 earnings were released. A closer examination into the company is necessary to help you determine whether Marvell is a good long-term investment.
How Marvell's business enables AI
For starters, it's necessary to understand how Marvell's business enables artificial intelligence. It's not as obvious as it is with AI darling Nvidia, which saw an astronomical rise in stock price over the past year since it produces semiconductor chips that act as the brain for an AI system.
Marvell, on the other hand, focuses on building components used in tech infrastructure. These products include routers, ethernet switches, and digital signal processors employed in data centers.
These components are important to AI because Marvell's products help to transmit massive amounts of data, which AI systems rely on to make decisions, at high speeds. Hence, Marvell plays a role in making AI tech work quickly and efficiently.
As a result, the part of Marvell's business supplying components to data centers is growing rapidly. In the company's fiscal Q4, Marvell's data center segment generated $765.3 million in revenue, an impressive 54% year-over-year increase.
Marvell's areas of concern for investors
Marvell's data center segment contributed the majority of its $1.4 billion in Q4 revenue. However, the rest of Marvell's businesses suffered year-over-year sales declines. This overall performance caused total Q4 revenue to come in essentially flat from the prior year despite the huge jump in data center income.
| Marvell Division | Fiscal Q4 2024 Revenue | Fiscal Q4 2023 Revenue | YOY Change |
|---|---|---|---|
| Data center | $765.3 million | $497.6 million | 54% |
| Enterprise networking | $265.0 million | $366.3 million | (28%) |
| Carrier infrastructure | $170.0 million | $275.4 million | (38%) |
| Consumer | $143.9 million | $179.8 million | (20%) |
| Automotive/industrial | $82.3 million | $99.4 million | (17%) |
Data source: Marvell Technology. YOY = year-over-year.
Because Marvell operates in the hardware business, it's susceptible to cyclical ups and downs. That's the case for those divisions experiencing year-over-year declines, according to Marvell management. The company expects this cyclical downturn to continue into its fiscal first quarter. Consequently, Marvell estimates Q1 revenue will come in around $1.2 billion, which is down from the prior year's $1.3 billion.
Another area of concern is Marvell's growing net losses. Even with the surge in demand for the company's data center solutions, Marvell notched a Q4 net loss of $392.7 million, compared with the prior year's net loss of $15.4 million.
To buy or not to buy Marvell stock
Despite the substantial year-over-year sales decrease across many of the company's business segments, according to CEO Matt Murphy, this trend will eventually reverse course in 2024.
Murphy stated, "While we are forecasting soft demand impacting consumer, carrier infrastructure, and enterprise networking in the near term, we expect revenue declines in these end markets to be behind us after the first quarter, and project a recovery in the second half of the fiscal year."
If he's correct, Marvell could see a significant revenue turnaround within a few quarters, since the company expects its data center division to continue generating strong sales. Of course, there's no guarantee Marvell's revenue will bounce back in the second half of this year, or by how much.
Therefore, at this time, it's best to monitor Marvell's progress over the next couple of quarters. That way, you can look for signs of financial improvement in its struggling business units before deciding to buy.
Over the long run, these divisions can make a recovery when a cyclical upswing in hardware purchases takes place. Combine this with the company's remarkable sales growth in its data center segment, and Marvell is a stock to keep on your watch list.
