Shares of Broadcom (AVGO +1.21%) delivered impressive gains of 82% in the past year thanks to the company's solid position in the market for custom artificial intelligence (AI) chips, which led to robust growth in the company's semiconductor business. It also helped that Broadcom was named the second-most important AI chip company after Nvidia by JPMorgan analyst Harlan Sur.
That designation is not surprising, as the company is the dominant player in the market for application-specific integrated circuits (ASICs) with an estimated share of 55% to 60%. More importantly, the company's dominance in this area is paying off nicely.
NASDAQ: AVGO
Key Data Points
Broadcom's strong rally in the past year is the reason why it now trades at an expensive 17 times sales and 70 times trailing earnings. This expensive valuation may deter investors from buying more Broadcom stock and have them looking for alternatives.
Another way to capitalize on the growing demand for custom AI chips is Marvell Technology (MRVL -5.57%). Let's look at the reasons why.
AI is giving Marvell Technology a nice lift
Marvell Technology released fiscal 2025 second-quarter results (for the three months ended Aug. 3, 2024) on Aug. 29. The company's revenue fell 5% year over year to $1.27 billion, while non-GAAP earnings fell 9% to $0.30 per share. However, Marvell stock surged more than 9% following its results. That may seem surprising at first, considering the contraction in its top and bottom lines, as well as the fact that its numbers were almost in line with consensus estimates. Wall Street was expecting earnings of $0.30 per share on revenue of $1.25 billion.
However, a closer look at the company's data center business helps explain why investors gave its results the thumbs up. Marvell sold $881 million worth of data center chips last quarter, an increase of 92% from the same period last year. This segment produced 69% of the company's top line in fiscal Q2, and the good part is that Marvell's data center growth could accelerate as it is ramping up production ramp of its AI chips.
In the words of CEO Matthew Murphy on the latest earnings conference call:
Our AI custom silicon programs are progressing very well with our first two chips now ramping into volume production. Development for new custom programs we have already won, including projects with the new Tier 1 AI customer we announced earlier this year, are also tracking well to key milestones.
Murphy added that he expects data center "revenue growth to accelerate into the high teens sequentially on a percentage basis" in fiscal Q3, which would be an improvement over the 8% sequential growth this segment clocked last quarter. More importantly, Marvell management believes that the company is on track to exceed the $1.5 billion in fiscal 2025 AI-related revenue it forecast earlier this year.
The company anticipates that the ramp-up in the production of its custom AI chips, a strong order book, and the fact that it has secured enough supply to meet the end market demand should allow it to sustain the healthy growth of its AI-related revenue in the current fiscal year and the next one. More importantly, the custom AI chip market presents a healthy long-term growth opportunity for Marvell.
NASDAQ: MRVL
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JPMorgan analysts estimate that the custom AI chip market presents a cumulative revenue opportunity of $150 billion over the next four to five years. While the investment bank points out that Broadcom is in a great position to capitalize on this opportunity, investors should note that Marvell is the second-largest player in the ASIC market, with an estimated share of 15%.
That share is translating into impressive growth in the company's data center business, as we saw earlier, and the guidance indicates that the trend is here to stay. Marvell guided for $1.45 billion in revenue and $0.40 per share in adjusted earnings for the current quarter. That's going to mark a return to top-line growth for the company, as it recorded $1.42 billion in revenue in the same period last year. The company's earnings decline would almost come to a halt as it reported $0.41 per share in earnings in the same quarter last year.
Additionally, Marvell expects all of its end markets to return to sequential growth in the current quarter. Again, that's not surprising as the weakness prevailing in its other business segments was gradually waning.
Strong earnings growth and a reasonable valuation make Marvell stock worth buying
Marvell's earnings in fiscal 2025 are expected to decline slightly from the previous fiscal year's reading of $1.51 per share. But as the chart below indicates, its earnings growth is set to kick into a higher gear beginning in fiscal 2026.
MRVL EPS Estimates for Current Fiscal Year data by YCharts
The market could reward this impressive acceleration in Marvell's earnings with more upside. That's the reason why investors looking for an alternative to Broadcom should consider buying Marvell hand over fist. It sports a relatively cheaper price-to-sales ratio of 12.5 and has a forward earnings multiple of 30, almost in line with the Nasdaq-100 index's forward earnings multiple (using the index as a proxy for tech stocks).
Assuming Marvell manages to generate $3.41 per share in earnings after a couple of years and it trades at 30 times earnings at that time, its stock price could jump to $102. That would be a 34% increase from current levels, though the possibility of more gains cannot be ruled out, considering the massive AI chip opportunity that this semiconductor company is sitting on.
