The booming popularity of artificial intelligence (AI) gave Nvidia (NVDA 4.43%) a massive lift so far in 2023, with shares of the semiconductor giant trading up more than 240%, but this also means that the stock is richly valued right now.
Nvidia now trades at 120 times trailing earnings, and it has a price-to-sales ratio of 37. This clearly makes Nvidia an expensive bet for investors looking to cash in on the AI boom. Of course, Nvidia seems capable of justifying its expensive valuation, as its latest quarterly results, which were released on Aug. 23, indicate.
NASDAQ: NVDA
Key Data Points
The chipmaker's revenue in the second quarter of fiscal 2024 (for the three months ended July 30, 2023) doubled year over year to $13.5 billion. Its adjusted earnings shot up 429% to $2.70 per share. Even better, Nvidia expects its revenue growth to accelerate in the current quarter. Its revenue guidance of $16 billion points toward a 171% year-over-year jump, indicating that growth investors looking for a top AI stock can still consider buying it given its eye-popping growth.
Still, there are investors out there who aren't comfortable buying Nvidia at such expensive multiples. That's why Marvell Technology (MRVL +2.94%) could turn out to be a nice alternative. Let's look at the reasons why.
AI is turning out to be a key catalyst for Marvell
Marvell supplies storage, connectivity, and custom chips that are used in multiple verticals, such as data centers, cloud computing, automotive, enterprise networking, and telecommunications. The company faces some headwinds in some of its end markets, which explains why its latest quarterly performance wasn't great.
Marvell released fiscal 2024 second-quarter results (for the three months ended July 29, 2023) on Aug. 24, and the stock price fell over 6% as Wall Street wasn't impressed with its numbers. That wasn't surprising as the chipmaker's revenue was down 12% year over year to $1.34 billion, while adjusted earnings fell a whopping 42% to $0.33 per share.
The steep declines can be attributed to weakness in Marvell's key end markets, especially the data center segment. The company's data center revenue fell 29% year over year to $460 million, owing to weak demand for data center storage.
Marvell CEO Matt Murphy said on the latest earnings conference call, "Storage end market demand remains significantly depressed and customer inventory remains high." He added, "The industry's expectations for a data center storage recovery have pushed out meaningfully," suggesting that the segment is likely to remain under pressure. Also, demand from enterprise data center customers was weak last quarter, adding to Marvell's woes.
But at the same time, it is worth noting that Marvell's business is getting a boost thanks to AI deployments. The chipmaker saw a 20% sequential increase in cloud revenue last quarter, driven by increasing investment in AI infrastructure. Marvell says that it saw stronger than anticipated AI-driven demand. More importantly, management also said that the "demand for our AI products continues to grow at an extraordinary rate."
NASDAQ: MRVL
Key Data Points
This explains why Marvell expects its AI-focused revenue to hit a quarterly run rate of more than $200 million this year, which would translate into annual revenue of $800 million. That's going to be a huge jump as compared to the $200 million AI-related revenue Marvell generated in fiscal 2023. The company expects its AI revenue will double in fiscal 2024, but its latest projection suggests that it is going to increase at a much faster rate.
More importantly, Marvell's AI revenue projection suggests that this technology is going to move the needle in a much bigger way for the company. The chipmaker is expected to finish the fiscal year with $5.5 billion in revenue, which means that AI could produce almost 15% of its top line. Looking ahead, it won't be surprising to see AI becoming a bigger growth driver for Marvell, as there is a $36 billion revenue opportunity for the company in this space.
All this tells us why Marvell is expected to regain its mojo after struggling this year.
MRVL Revenue Estimates for Next Fiscal Year data by YCharts.
This potential AI winner seems attractively valued
Marvell's price-to-sales ratio of 8 is on the higher side when you consider that the S&P 500 sports a sales multiple of 2.5. But it is relatively cheaper when we consider how expensive AI stocks are. Also, the pace at which its AI revenue is growing and the turnaround in its fortunes that analysts anticipate in the next couple of years suggest that Marvell may get more expensive with time.
The semiconductor stock's price is already up 49% in 2023. Its median price target of $70, as per a consensus of 27 analysts, indicates that it could jump another 27% in the next year. However, there is a possibility that Marvell could even hit the Street's high price target of $100 -- which would translate into 81% gains from current levels -- if its AI-driven growth continues to outpace expectations, which is why investors looking to buy an AI stock can consider buying it before it shoots higher.
