The semiconductor sector has made a terrific recovery over the past few months after March's novel coronavirus-fueled crash thanks to strong demand for chips used in data centers and memory products. And the recent update from chip giant Samsung indicates that the semiconductor industry continues to see good times.
The South Korean giant anticipates a 23% jump in its second-quarter operating profit on account of strong data center chip sales. The good part is that chip demand from data centers is likely to remain strong in the wake of COVID-19 as organizations shift their employees to a work-from-home model to maintain business continuity.
McKinsey estimates that semiconductor demand for wired applications is expected to jump around 8% to 11% this year thanks to an increase in internet traffic. The management consulting firm expects wired semiconductor sales to increase in the future even if the broader economic weakness persists.
This is why now would be a good time to take a closer look at Marvell Technology Group (MRVL 2.43%), which has delivered attractive gains so far in 2020 thanks to data center-driven growth.
Marvell Technology has a big data center opportunity
Marvell Technology gets 57% of its revenue from the networking business, providing embedded processors, custom chips, and ethernet solutions. The segment's revenue shot up 15% year over year during the first quarter of fiscal 2020 that ended on May 2 thanks to "stronger-than-expected demand from our datacenter and 5G infrastructure end markets," as CEO Matt Murphy said during the last earnings conference call.
The company's server processor platforms are designed to accelerate workloads and applications in hyperscale data centers. These types of data centers are powerful enough to take care of artificial intelligence (AI)-related workloads, as they contain millions of virtual machines and thousands of servers. Datacenter operators can optimize the performance and cost of their cloud infrastructure by offloading certain workloads to chip platforms provided by the likes of Marvell, which are formally known as data processing units (DPUs).
DPUs are expected to become the third type of accelerators that will be deployed in data centers after central processing units (CPUs) and graphics processing units (GPUs). Third-party estimates project that the data center accelerator market could clock a compound annual growth rate (CAGR) of nearly 39% through 2025, hitting a size of more than $35 billion.
This tremendous growth in demand is expected to be driven by an increase in bandwidth requirements, the growth of AI applications, and an effort to lower the operating costs of data centers. As such, Marvell Technology's networking business could keep up its impressive pace of growth thanks to the tremendous opportunity in the data center market.
However, this is not the only way Marvell stands to gain from data centers.
Tailwinds in the storage business
Marvell's storage business is poised to be another beneficiary of data center growth, and the good part is that it accounts for 37% of the company's total revenue.
As data centers grow to handle more data, they will need faster storage options to process queries quickly. This is where Marvell's storage accelerators are expected to step in. The company has been transitioning from traditional hard-disk drive chips to near-line drives that are critical to the functioning of data centers.
Demand for near-line drives was reportedly up 26% quarter over quarter in the first quarter of 2020, as data centers increased their storage capacities to tackle the increased load caused by the switch to a work-from-home model. It is now widely believed that the remote employment model is here to stay even after the pandemic is over thanks to productivity and cost gains.
All in all, the growing demand for data center chips should be a tailwind for Marvell Technology in the future -- along with other catalysts such as 5G wireless networks -- that could make it a top semiconductor stock in the long run.