If Google Were to Part Ways With Broadcom, Could Marvell Stock Benefit?

The rumor mill in the semiconductor world recently fired up, with suggestions that Alphabet's (NASDAQ: GOOG) (NASDAQ: GOOGL) big Google business might be looking to part ways with Broadcom (AVGO 3.84%). Google denied such claims, saying Broadcom was an excellent partner on a custom compute offload project: Google TPUs (tensor processing units) and related networking chips.  

Nevertheless, Broadcom's chief competitor in the custom chip space, Marvell Technology Group (MRVL 3.17%), could have a lot to gain if it could pull off a coup. Here's what investors need to know.

Marvell is as mum as Broadcom

First, a little background on custom chip designs, also known as application-specific integrated circuits (ASICs). Broadcom gets queried about its big compute offload ASIC customer (now all but confirmed to be Google), on which it declines to comment at length due to the sensitive nature of these projects.

Why? ASICs are ridiculously expensive to design and manufacture. These days, customers tend to be tech giants operating numerous data centers and global cloud computing infrastructure, with a very large and very specific software function that would benefit from a custom chip optimized for this workload. It's been suggested by various executives, including Marvell CEO Matt Murphy, that a customer needs to be willing to spend at least $1 billion over the lifetime of the project for it to make sense to hire an ASIC engineering team at the likes of Broadcom or Marvell.

Despite the sensitive nature of these projects, Broadcom discussed its ASIC business in the spring of 2022. At the time, it said it earned nearly $800 million in fiscal 2021 for routing and switching ASICs, and nearly $1.6 billion from compute offload processors -- those Google TPUs and networking components used in specific AI workloads at Google and for Google Cloud.

More recently, though, Wall Street analysts have estimated the annual spending on tech titan ASIC projects to be $4 billion, with $3 billion of that dominated by just one North American semiconductor company (Broadcom). That leaves about $1 billion a year, an unknown but probably sizable chunk of it attributable to Marvell's ASIC teams. Murphy and company aren't divulging much, other than that they are competitive.

Marvell hauled in $5.8 billion in sales over the trailing 12 months, so its custom engineering teams -- working on projects like data centers, cloud, cybersecurity, and 5G infrastructure -- could make up a sizable chunk of revenue. 

Why ASICs are big(ger) business in the AI era

Both Broadcom and Marvell have been reporting a wave of massive growth from AI networking (chips managing data center traffic) through the end of next year. Generative AI-specific chips, both ASICs and merchant silicon (non-custom general purpose chips), could make up one-quarter of revenue by 2024, a big jump from zero.

This networking infrastructure is thanks in large part to Nvidia's AI GPU business, a non-ASIC semi-custom chip type that needs massive amounts of data to be moved around and coordinated to work. It may be that much of Marvell and Broadcom's AI networking chip boom is also non-ASIC.

But that could change going forward. Marvell made its big ASIC acquisition of Avera from GlobalFoundries in 2019 (GlobalFoundries itself bought this unit from IBM in 2015). The year prior, Marvell also bought a processor designer called Cavium, which was working on its own AI chip. Marvell decided to shut it down and concede early defeat to Nvidia, which at the time Marvell hadn't imagined would be as big a deal as it's been in 2023.

However, with Nvidia AI systems now costing tech giants tens of billions of dollars a year, interest in custom AI work is increasing. Marvell has said it's been scoring some new projects in recent quarters. This could have fueled the talk that Google has been seriously moving from Broadcom to Marvell, or at least diversifying the third-party engineering teams it works with on its massive data center computing fleet.

A coup, even a partial one, could mean significant gains for Marvell, the "baby Broadcom," as I call it. But even if everyone stays in their lane, custom AI work could be big business for Marvell and Broadcom. In early 2022, Broadcom divulged that its ASIC business had been growing at an average of 20% a year.  

That's nearly triple the rate of expansion of the chip market overall. Perhaps Marvell's ASIC business is growing at a similar rate in the artificial intelligence (AI) era. Marvell is a top chip stock worth keeping tabs on. 

At this juncture, though, everything except AI is in contraction as the industry deals with an overhang of inventory left over from the pandemic boom times. Marvell stock has been an incredibly bumpy ride the last few years, and that could continue for now. I'm optimistic on the long-term potential but am approaching Marvell stock with caution for now.