Marvell Technology (MRVL 3.17%) and Texas Instruments (TXN 1.27%) (TI) are both well-diversified chipmakers that serve a wide range of markets. But over the past 12 months, Marvell's stock rallied over 20% higher as TI's stock slipped 2%. Let's see why that happened, and if Marvell will continue to outperform TI for the foreseeable future.
The differences between Marvell and TI
Marvell is a fabless chipmaker that outsources its production to third-party foundries. TI is an integrated device manufacturer (IDM) that produces its own chips.
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TI's business model might seem more capital-intensive than Marvell's, but it actually operates at much higher gross and operating margins than its fabless peer thanks to its superior scale and its ongoing transition from 200mm to 300mm analog chips, which will eventually reduce the long-term costs of its unpackaged parts by roughly 40%.
In its latest quarter, TI had a gross margin of 64.2% and an operating margin of 43.5%. Marvell had a gross margin of 38.9% (60.3% on an adjusted basis which accounts for its recent acquisitions) and a negative operating margin of 15.3%.
Marvell sells 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 -- and generates most of its growth from the cloud, 5G, auto, and enterprise networking markets. It expects its sales of artificial intelligence (AI)-oriented chips to data center customers to reach an annual revenue run rate of roughly $800 million in fiscal 2024 (which started this January). That would account for about 14% of its projected revenue for that full year.
TI sells a wide variety of analog and embedded chips for the automotive, personal electronics, communications, and enterprise systems markets. Macro headwinds battered all those markets over the past year, but the sequential stabilization of its automotive and personal electronics end markets suggests it's near a cyclical trough.
But unlike Marvell, TI didn't discuss the stand-alone growth of its AI-oriented chips. That's one of the reasons Marvell attracted more attention than TI over the past year: The rise of generative AI platforms drove the bulls to load up on AI-oriented stocks like Marvell, while the broader slowdown of the semiconductor market weighed down TI's shares.
Which company is growing faster?
The other reason Marvell outperformed TI was its revenue growth. Marvell's revenue rose 50% in fiscal 2022 -- partly driven by its acquisitions of Inphi, which sells mixed-signal integrated circuits, and Innovium, which sells networking solutions for data centers. Its revenue rose another 33% in fiscal 2023.
Marvell's revenue declined year over year in the past three quarters as it lapped those acquisitions and encountered more macro headwinds. However, the market's robust demand for its data center AI chips partly offset its slower sales of non-data center chips. Analysts expect its revenue to decline 7% in fiscal 2024 but rise 18% in fiscal 2025. They expect its adjusted EPS to decline 27% in fiscal 2024 but grow 53% in fiscal 2025.
TI's revenue rose 27% in 2021 as it experienced a post-pandemic recovery, but grew just 9% in 2022 and also turned negative year over year in its past three quarters. Analysts expect its revenue to decline 10% in 2023 but rise 7% in 2024 as the macro environment improves. They expect its earnings to drop 22% in 2023 and rise 8% in 2024.
TI's earnings are expected to rise at a slower rate than Marvell's because it's ramping up its investments in its 300mm plants. As a fabless chipmaker, Marvell only needs to worry about designing new chips instead of manufacturing them.
The valuations and verdict
Marvell's strong sales of AI and cloud-oriented chips for data centers lit a fire under its stock, but it now looks pricey at 33 times forward earnings. Its paltry forward yield of 0.5% also won't attract any income investors. TI, which was left out of the AI rally, trades at just 20 times forward earnings and pays a decent forward yield of 3.3%. Marvell and TI are both promising long-term investments, but TI's lower valuation, higher yield, and superior margins all make it the better buy right now.
