Marvell's AI Chips Fail to Provide a Big Boost to Growth, but That Could Change Soon

Marvell Technology's (MRVL 3.17%) stock is falling again after benefiting from Nvidia's knockout earnings in recent months. Marvell provides some essential semiconductor components for companies building computers for artificial intelligence (AI) that Nvidia graphics processing units (GPUs) power. But the problem is that non-AI chips aren't so hot right now.

That being said, Marvell upgraded its outlook for AI sales. Once a more fully fledged rebound solidifies, Marvell's financials could be in for a big rebound. Is the stock a buy now? 

Marvell's financials didn't look so great...

A few months ago after the initial Nvidia AI pop, I said to be leery of chasing Marvell stock after it ran higher on AI optimism, too. The earnings update for the second quarter of fiscal 2024 (for the three months ended in July 2023) just proved why. 

Marvell reported revenue of $1.34 billion in its second quarter, a 12% year-over-year decline and just a 1.5% quarter-over-quarter increase. Revenue is expected to be a bit higher in the third quarter, $1.4 billion at the midpoint of guidance, as Marvell keeps working through enterprise customer weakness (non-cloud data centers) due to excess inventory of some components and economic concerns (customers are in cash conservation mode this year).

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

So much for the hoped-for boost from AI. Only the automotive segment, where Marvell supplies vehicle networking parts (to move data from sensors to a car's central computer to the in-cabin displays for drivers), notched really healthy year-over-year growth last quarter.

Profitability wasn't so hot either. Net loss under generally accepted accounting principles (GAAP) was $208 million in Q2, or $290 million in net income on an adjusted basis. The difference between the two profit metrics is primarily non-cash depreciation and amortization expenses of $75.5 million and $272 million, respectively (from a string of acquisitions made a few years ago), and stock-based compensation of $153 million. Free cash flow (FCF) in the quarter was $1 million, compared to positive FCF of $105 million in the first quarter.  

Here's the big AI upshot...

There was some good news, though, despite ongoing weakness in most of Marvell's semiconductor portfolio. CEO Matt Murphy said on the earnings call:

Based on our latest demand outlook for our Electro-Optics products, we now expect revenue from AI to exit this year at over a $200 million quarterly revenue run rate or $800 million annualized. This is well above what we had outlined last quarter. Put this in perspective, this would put us at the run rate we had previously communicated for all of next year.

Marvell's chips used in the latest generative AI servers are off to a hot start. Come calendar year 2024, Marvell should be sitting on a new product line worth well in excess of $1 billion for the full-year period. That's significant, given that Marvell's all-time peak annual revenue was just shy of $6 billion in 2022. The key to the company surpassing that previous peak will be the rest of the data center and enterprise computing business solidifying going forward. Ongoing 5G network construction would help, too.

With Marvell still anticipating just a moderate uptick in sales activity in Q3, it's still hard for me to say it's time to buy. Shares trade for an elevated 60 times trailing-12-month free cash flow, although part of that high price tag has to do with depressed profitability during the ongoing semiconductor downturn. Perhaps by the fourth quarter, or early next year, things will start to heat up again. For now, Marvell is maybe a dollar-cost-average candidate for investors thinking generative AI is the real deal long-term, but prudence and patience could pay off here ahead of a more robust rebound in the business.