Is It Too Late to Buy Marvell Technology Stock?

Marvell Technology's (MRVL 3.17%) stock price has rallied over 40% so far this year even as the company grappled with the broader slowdown in the semiconductor market. It has also outperformed the PHLX Semiconductor Sector index's year-to-date gain of 33%.

Does this diversified chipmaker still have room to run? Let's review its growth rates and valuation to find out.

Image source: Getty Images.

How long will Marvell's slowdown last?

Marvell produces data processing units (DPUs), which bundle together CPUs, networking interfaces, and programmable data acceleration engines. It also sells infrastructure, Wi-Fi, and custom chips, as well as networking and storage hardware.

It's a fabless chipmaker that outsources its production to third-party foundries, and it generates most of its growth from the cloud, 5G, auto, and enterprise networking markets. In 2021, Marvell acquired Inphi, which makes mixed-signal integrated circuits; and Innovium, which produces networking solutions for data centers.

Those two acquisitions, along with the growth of Innovium's data center chip business, boosted Marvell's revenue by 50% to $4.46 billion in fiscal 2022 (which ended in January 2022). After lapping both of those acquisitions in fiscal 2023, Marvell's revenue rose another 33% to $5.92 billion.

But over the past three quarters, Marvell's revenue declined year over year, it bled red ink on a generally accepted accounting principles (GAAP) basis, and its adjusted gross margin contracted. It attributed that deceleration to macro headwinds that curbed the market's near-term appetite for new chips.

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

Marvell expects that slowdown to continue, with a 9% year-over-year revenue decline in the third quarter. However, that would also represent 4% sequential growth from Q2, as well as its second consecutive quarter of sequential growth. It also expects its adjusted gross margin to rise sequentially to 60.3%-61.3%.

That quarter-over-quarter stabilization suggests Marvell has reached the trough of its cyclical downturn. It partly attributes that recovery to the faster-than-expected growth of its data center end market, which expanded 6% sequentially in the second quarter and surpassed its previous outlook for flat growth.

Its end markets are recovering

Marvell's acceleration in the data center market was primarily driven by the rapid expansion of the artificial intelligence (AI) space. During its second-quarter conference call, the company predicted it would generate about $800 million in revenue from AI chips in fiscal 2024. That would account for 14% of its projected revenue of $5.53 billion for the full year.

Marvell's auto, industrial, and consumer end markets are also growing year over year again after weathering some tough macroeconomic headwinds over the past year. Analysts expect its revenue to decline 7% for the full year but rise 18% in fiscal 2025 as it fully laps its cyclical slowdown and the macro environment improves. They forecast its adjusted EPS to decline 27% in fiscal 2024 but rise 53% in fiscal 2025.

But based on these estimates, Marvell still isn't a bargain at 33 times forward earnings, and its paltry forward dividend yield of 0.5% also won't attract any serious income investors. In comparison, peer Broadcom -- which is growing at a slower rate -- trades at just 18 times forward earnings and pays a forward yield of 2.3%.

Marvell also hasn't bought back any shares in fiscal 2024. Plus, its insiders dumped over 1.1 million shares over the past 12 months and didn't buy a single share. That chilly insider sentiment suggests Marvell's near-term upside is limited.

Is it too late to buy Marvell's stock?

I don't think it's too late to buy Marvell because it's well diversified and its robust AI chip sales could offset slower sales of its legacy chips. But a lot of its near-term growth is already baked into its current valuation, and its lack of buybacks and insider purchases suggest it won't head much higher this year. It's still a decent investment for long-term investors, but I'd take a closer look at cheaper chip stocks before adding Marvell to my shopping list.