The artificial intelligence (AI) craze sent shares of Nvidia (NASDAQ: NVDA) soaring in 2023. As many investors know, the chipmaker has benefited from the massive demand for its graphics cards, which are being used to train and power the large language models (LLMs) that underlay popular applications such as ChatGPT. The good news is that it is likely to sustain its terrific momentum in the new year as well.
However, the downside to Nvidia's surge is that it now carries a rich valuation. And given that it trades at 27 times sales and 64 times trailing earnings, value investors will likely be looking for alternative ways to capitalize on the AI boom. This is where Marvell Technology (MRVL 3.17%) comes in.
Shares of Marvell are up by 62% in 2023, which may seem a bit surprising at first given the chipmaker's tepid financial performances in recent quarters, when it faced headwinds due to weak spending by its data center and enterprise business customers.
But a closer look at Marvell's business reveals signs that its fortunes are set to turn around, and that AI will play an important role in driving improvements in its financial performance.
Look past the near-term weakness in Marvell Technology
Marvell released its fiscal 2024 third-quarter results on Nov. 30. For the period, which ended Oct. 28, revenues fell nearly 8% year over year to $1.42 billion, while non-GAAP earnings were down 28% to $0.41 per share. Those numbers were slightly better than analysts' expectations, but management's tepid guidance was not.
The chipmaker anticipates $0.46 per share in earnings in the current quarter on revenue of $1.42 billion. Analysts' consensus estimates were for $0.49 per share in earnings on $1.46 billion in revenue. President and CEO Matt Murphy noted out on the November earnings conference call that the "telco environment and capex spending is very constrained out there and the end customers seem to be having some trouble."
Meanwhile, Marvell also saw weakness in the on-premises data center and enterprise networking markets. The silver lining, however, is that Marvell's guidance for the current quarter suggests that it is on the verge of a turnaround. The company's expects its revenue and earnings will be flat on a year-over-year basis in fiscal Q4. More importantly, analysts are expecting Marvell to return to growth in the next fiscal year, which will begin in February.
MRVL Revenue Estimates for Current Fiscal Year data by YCharts.
The company's cloud business, which is benefiting from the growing adoption of its AI offerings, is likely to play a central role in this growth.
The AI business is gaining traction
According to Murphy, the company's AI business is growing at a faster-than-expected pace. As he remarked on the latest earnings call:
In our last earnings call, we provided a forecast for AI revenue to cross a $200 million quarterly run rate exiting this year. Since then, demand has continued to grow, and we now expect our AI revenue in the fourth quarter to come in significantly above our forecast.
In other words, Marvell's AI-related business is on track to generate more than $800 million in revenue on an annual basis in the next fiscal year. Murphy's estimate that he expects AI revenue to be "significantly above" management's quarterly revenue run rate of $200 million indicates that this business could clock even $1 billion in revenue in fiscal 2025, based on a $250 million quarterly run rate.
If that's indeed the case, AI could account for a sixth of Marvell's top line in the next fiscal year based on its $6.1 billion revenue forecast. However, Marvell's AI business could become much bigger in the future thanks to the growing demand for AI servers, which will create the need for faster data center interconnections.
Marvell points out that generative AI applications are powered by "thousands of supercomputers interconnected by ultra-high bandwidth and low latency optical connections," which explains why the data center interconnect market is expected to more than triple in size over the next decade and generate $28 billion in annual revenue in 2032. As such, Marvell's AI business seems set for long-term growth, which is why investors would do well to buy the stock before it heads higher.
Why it's a good idea to buy the stock right now
Marvell Technology stock trades at 9.4 times sales, which is significantly cheaper than Nvidia. Additionally, Marvell's forward earnings multiple of 38 is lower than Nvidia's multiple of 55. Of course, Nvidia is growing at a much faster pace, which helps justify that expensive valuation, but at the same time, investors shouldn't forget that Marvell's growth rate is expected to improve as well.
Assuming Marvell does hit its fiscal 2025 earnings estimate of $2.01 per share -- up 33% from the current fiscal year's estimate of $1.51 per share -- its stock price could hit $76 per share if it maintains its forward earnings multiple. That would represent a 26% gain from current levels. However, it won't be surprising to see Marvell stock jump higher if its earnings grow at a faster pace on the back of the strengthening AI catalyst, or if the market decides to reward it with a higher earnings multiple.
All of this indicates that investors looking to capitalize on the AI trend by buying a semiconductor stock should consider picking up shares of Marvell Technology before they surge higher.
