Marvell Technology Stock Is Up Over 40% in a Week -- Too Late to Buy the AI Hype?

Marvell Technology (MRVL -1.86%) doesn't want to be left out of the artificial intelligence (AI) race that larger peer Nvidia has sparked. Tapping into the power of simply mentioning the word "AI" on earnings calls, Marvell management talked up its own work on chips for generative AI services like ChatGPT -- and if its financial guidance is to be believed, all this could be a big deal for Marvell too. 

The news helped the stock price jump over 40% higher in the last week alone, but could Marvell soar even higher in the years ahead?  

Marvell's financials didn't look so great

Marvell reported revenue of $1.32 billion in its first quarter of fiscal 2024 (the three months ended in April), a 9% year-over-year decline. Revenue is expected to be just slightly higher in Q2, $1.33 billion at the midpoint of guidance, as Marvell continues to help its enterprise customers (non-cloud data centers) digest excess inventory of components.  

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

Profitability was weak as well, in line with other chip companies, as excess inventory led to lowered sales and margins on products sold. Net loss was $169 million in Q1. On an adjusted basis, Marvell reported net income of $264 million, with the difference between the two profit metrics primarily composed of non-cash depreciation and amortization expense (from a string of acquisitions made a few years ago). Free cash flow in the quarter was positive at $105 million.  

Given the results, the stock leaping as much as it did is indeed surprising. The cause seems to be Nvidia's bullishness on AI and Marvell took the cue to follow the leader.

Will AI take Marvell stock to the next level?

In conversations with many executives around the industry over the years, I've been told something like, "AI is just one type of app for the cloud" many times. As of late, that tune seems to be changing. Marvell CEO Matt Murphy admitted as much on the earnings call:

In the past, we considered AI to be one of many applications within cloud, but its importance and therefore, the opportunity, has increased dramatically. Generative AI is rapidly driving new applications and changing the investment priorities for our cloud customers.

The market seems to have taken note of Murphy's comments and rewarded Marvell stock accordingly -- even though the last quarter's financials (or the outlook for Q2) have yet to reflect much positive traction from AI. However, Murphy did say that sequential growth is expected to accelerate in the second half of this year (Q3 and Q4) and into next year (fiscal 2025 for Marvell). 

In fact, Murphy said AI-specific revenue was $200 million last year, and is expected to at least double again this year (at least $400 million). Then, in fiscal 2025, Murphy said Marvell's pipeline of projects should cause AI revenue to double once more (at least $800 million), leading to a compound annual growth rate of at least 100% from fiscal 2023 to 2025.

Marvell's total revenue in the last reported 12 months was $5.8 billion, so $800 million in sales from new AI chips next year promises to provide significant growth for this semiconductor designer. Additionally, Murphy said that engagements with customers have increasingly slanted toward AI use cases. In previous long-term forecasts, Marvell's custom chip work was 20% AI. Today, Murphy says AI now accounts for half of that work.  

Is Marvell stock a buy?

Given the massive surge in Marvell stock in tandem with Nvidia's earnings report, it might be tempting to chase the stock. Indeed, if Murphy's commentary is correct, Marvell could soar further in the coming years as customers are in need of more chips -- and many of those chips with a higher sales price -- to meet their generative AI projects. 

However, after the massive surge in share price, Marvell trades for a premium (55 times trailing-12-month free cash flow as of this writing) but hasn't delivered on AI growth yet. The market looks like it has rewarded Marvell too soon, at least in my opinion.  

That being said, I've owned shares of Marvell for years, and remain optimistic about the company's long-term prospects. I'm standing pat on the position I have now. But I'd caution about chasing this one. Be patient, as Marvell stock is likely to be highly volatile this year, especially with AI hype running hot.