Top data center and 5G semiconductor company Marvell Technology Group (MRVL 0.55%) has not escaped the bear market of 2022. After the company's third-quarter update, shares are down just over 50% on the year. Parts of the chip industry are in the midst of a cyclical downturn, and these issues have boiled over into Marvell's business as well. The next couple of quarters will be difficult as a result.  

Nevertheless, Marvell has multiple growth opportunities ahead of it that could last for many years. With spending on cloud and mobile infrastructure booming, is this tech stock a buy as 2022 draws to a close?

Some cloud demand temporarily evaporates

On the surface, Marvell had a solid fiscal 2023 third quarter (the three months ended Oct. 29). Total revenue (which got a slight boost from the acquisition of Innovium last year) increased 27% to $1.54 billion. And as expected in the wake of a busy 2021 for Marvell's merger and acquisition engine, earnings per share finally returned to positive territory at $0.02, versus an $0.08 loss in the year-ago quarter. On an adjusted basis, earnings per share jumped 33% to $0.57 as operating margin got a boost from Marvell's expanded portfolio of data center and enterprise chips after taking over Innovium and Inphi.

However, pockets of weakness appeared in the quarter, even in Marvell's cloud and enterprise segments. China's rapidly deteriorating economy means Chinese tech customer revenue will be down by one-third compared to where it was just a few months ago by the end of Marvell's current fiscal year. Additionally, an excess of memory and related component inventory has data center infrastructure manufacturers slowing their purchases of Marvell's products as they work through what they already have in stock.  

This is the same issue that's also impacting memory chipmakers like Micron Technology, though Micron is getting simultaneously hit by a slowdown in PC and smartphone purchases too. Marvell's business has limited exposure to consumer markets with 88% of sales going to enterprise end markets in the fiscal third quarter. Consumer products continue to be deprioritized in favor of data center, mobile and 5G, and automotive and industrial chip design.  

Marvell Technology Group Segment

Q3 Revenue

YOY Increase (Decrease)

Data center

$627.3 million

26%

Enterprise (non-data center and cloud)

$376.0 million

52%

Mobile carriers (5G networks and other)

$271.4 million

26%

Consumer markets

$178.4 million

(2%)

Automotive and industrial

$84.2 million

26%

Data source: Marvell Technology Group. YOY = year over year. 

How high can Marvell fly?

As a result of this temporary weakness in the cloud market, especially when it comes to storage solutions, Marvell is anticipating fourth-quarter revenue of $1.4 billion at the midpoint of guidance, up just 4% year over year.

This forecast assumes data center revenue will decline at a mid- to high-teens percentage rate year over year, offset by a high-40% increase in enterprise and mid-teens percentage increase in mobile carrier sales. As for the data center segment, CEO Matt Murphy explained that declines are most pronounced where the sale is to a manufacturing intermediary, versus a direct sale to an end customer. This is known as the supply chain "bullwhip effect," where errors in predicting end-market demand occur because of being too far removed from the customer in the supply chain.

The good news is these inventory problems are expected to be corrected by early calendar year 2023, and growth across the board at Marvell will resume. Murphy reiterated expectations that Marvell's focus on data centers, enterprise, 5G networks, and automotive will continue to outpace the broader semiconductor market for at least a few years to come. That's significant, considering various estimates right now point toward global chip sales averaging about a 7% to 9% annual increase between now and 2030.

Is the stock a buy today? On an adjusted basis, Marvell has generated $2.16 per share over the last four quarters. Using a discounted cash flow model with a discount rate of 11%, if you think Marvell will grow earnings at a 9% rate through 2030, shares are fairly valued today.  

Of course, Marvell fully expects to grow at a far faster pace in the next couple of years after its customers fix their inventory oversupply -- both from industry growth but also expansion of its profit margins. Adjusting your expectations a bit higher to match Marvell's lofty aspirations could imply this top chip stock is a value right now, especially with long-term secular growth trends expected to push data center, cloud, 5G, and automotive technology higher. If you believe that's the case, Marvell Technology stock could be a fantastic investment right now as 2022 nears its bitter end.

I have a position in Marvell, and I'm tempted to start adding to it again after this latest update.