Marvell Technology (MRVL -0.46%) and Qualcomm (QCOM 1.51%) represent different ways to invest in the booming semiconductor market. Marvell produces data processing units (DPUs), which bundle together central processing units (CPUs), networking interfaces, and programmable data acceleration engines in a single chipset. It also sells other kinds of infrastructure chips, Wi-Fi chips, and custom chips, as well as networking and storage hardware.
Qualcomm is one of the world's largest producers of mobile system on chips (SoCs), which bundle together CPUs, graphics processing units (GPUs), and baseband modems for smartphones, tablets, and other devices. It also sells stand-alone baseband modems and leverages its portfolio of wireless patents to collect licensing fees from every smartphone maker. Both companies are fabless chipmakers that outsource their production to third-party foundries, including Taiwan Semiconductor Manufacturing Company, instead of operating their own foundries.
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Over the past 12 months, Marvell's stock rallied 85% as Qualcomm's stock rose nearly 40%. Let's see why Marvell outperformed Qualcomm -- and if it will remain the better growth play this year.
Marvell's AI growth is outshining its near-term slowdown
Marvell's revenue surged 50% in fiscal 2022 (ended in January 2022) and grew 33% in fiscal 2023. That rapid growth was driven by its acquisitions of Inphi and Innovium, as well as the organic growth of its cloud, enterprise networking, 5G, and auto markets. Its adjusted earnings per share (EPS) also jumped 71% in fiscal 2022 and 35% in fiscal 2023.
But in fiscal 2024, Marvell's revenue and adjusted EPS fell 7% and 21%, respectively. Its growth cooled off as it lapped its acquisitions and the macro headwinds curbed its chip sales to the carrier, enterprise networking, consumer, auto, and industrial markets. Those challenges offset the growth of its cloud, data center, and artificial intelligence (AI) markets.
In fiscal 2025, analysts expect Marvell's revenue and adjusted EPS to dip another 3% and 7%, respectively. That outlook seems grim, but Marvell expects to continue shipping more AI-oriented chips throughout the year -- especially optical chips, which are tethered to sales of AI accelerators like Nvidia's GPUs. AI chips accounted for over 10% of Marvell's revenue in fiscal 2024, compared to just 3% of its revenue in fiscal 2023, and that percentage should continue climbing in fiscal 2025.
Marvell's stock isn't cheap at 48 times forward earnings, but its growth is expected to accelerate significantly in fiscal 2026 as the macro environment warms up, it buys back more shares to boost its EPS, and its AI business expands. That said, its valuations still seem to have been inflated by the recent buying frenzy in AI stocks. Its paltry forward dividend yield of 0.3% also won't limit its downside potential in a sudden market downturn.
Qualcomm needs the smartphone market to recover
Qualcomm's revenue rose 32% in fiscal 2022 (ended in September 2022) as consumers continued to buy new 5G smartphones. But in fiscal 2023, revenue fell 19% as the 5G upgrade cycle ended. Macro headwinds, especially in China, exacerbated the industry's slowdown. Its adjusted EPS rose 47% in fiscal 2022, but dropped 33% in fiscal 2023.
Qualcomm is trying to diversify its business away from the cyclical smartphone market by selling more automotive and Internet of Things (IoT) chips, but it still generates most of its revenue from handset chips. It generated more than 10% of its revenue from Apple in fiscal 2023, but the iPhone maker reportedly plans to replace its baseband modems with its own first-party chips by 2026.
As Qualcomm's revenue declines, it faces fierce competition in the low- to mid-range smartphone markets from MediaTek, which stole the crown as the world's top mobile chipmaker over the past three years. Qualcomm also needs to keep pace with other chipmakers like Nvidia, Mobileye, and Ambarella in the automotive and IoT markets.
But in fiscal 2024, analysts expect Qualcomm's revenue and adjusted EPS to rise 6% and 16%, respectively, as the smartphone market stabilizes and it rolls out more powerful SoCs for processing AI applications. Analysts also expect Qualcomm's growth to accelerate in fiscal 2025. As Qualcomm waits for its core businesses to recover, it's cutting costs and buying back more shares. Its stock still looks cheap at 18 times forward earnings and it pays a decent forward dividend yield of 1.9%.
The better buy: Qualcomm
Qualcomm suffered a tougher cyclical downturn than Marvell, but it will likely recover this year as the smartphone market warms up again. It's still exposed to the AI market's secular growth through its newest mobile chips, but its valuations haven't been significantly inflated by the bullish stampede toward AI stocks and it pays a higher dividend. I believe those strengths make Qualcomm a much better buy than Marvell right now.
