Top artificial intelligence (AI) stocks typically trade at high valuations. Investors often pay significant premiums for the future growth they anticipate will come from these high-powered businesses. The danger with paying high multiples, however, is that it leaves little to no margin of safety in the event that something goes wrong, or that demand suddenly tapers off, or that economic conditions worsen. Paying a premium is just fine when things are going well, but it can quickly turn into a problem when they're not.
For investors, a more practical approach can be to focus on discounted stocks that are trading at more reasonable, even cheap valuations. One AI stock that's worth focusing on today is Marvell Technology (MRVL 3.47%). Its stock price is down big after earnings, but could the custom chipmaker be one of the best bargains in the market right now?
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Underwhelming guidance cripples Marvell's stock
Investors don't like uncertainty. It's an old adage in the stock market, but it rings true any time a company's guidance suggests there are a lot of question marks around its future growth. Marvell is a terrific example of that. The company recently posted strong earnings numbers, but it was its guidance that underwhelmed investors, prompting a sell-off.
Marvell makes application-specific integrated circuits (ASICs) that can be cost-effective alternatives to more generic chips, such as those from Nvidia. And while growth has been strong, the company's performance has been a bit choppy.
Data by YCharts.
Marvell's growth rate declined in its most recent quarter, for the period ending Aug. 2. Revenue of just over $2 billion rose by nearly 58% year over year (it was 63% a quarter earlier), which met analyst expectations. But for the current period, the company projects revenue of around $2.06 billion, which is lower than the $2.11 billion that Wall Street was expecting. And at $2.06 billion, its growth rate would fall to 36%; in the third quarter last year, its sales totaled a little over $1.5 billion.
A discounted option for AI investors
Marvell has a market cap of $56 billion, and it trades at a fairly modest price-to-earnings multiple of 22. Not only is that cheaper than the S&P 500 average of 25, but it's also well below the average of the Technology Select Sector SPDR Fund -- 39. By comparison, Marvell looks like an incredible bargain.
Investors have punished the stock for the poor guidance, and although it's not quite at its 52-week low of $47.09, it has still been an awful year for Marvell -- its shares are down more than 40%. CEO Matt Murphy isn't concerned, however, and says that there is strong demand for the company's chips and that while the current third-quarter sales may not look so great, he expects the fourth quarter to be much better.
NASDAQ: MRVL
Key Data Points
Is Marvell a steal of a deal?
Marvell is a compelling option to buy on weakness right now. The markets have a tendency to overreact to bad news or earnings misses, and I think that is the case with Marvell. Growth doesn't always happen in a straight line, and so while the near-term guidance may have disappointed investors, it's the longer-term picture that should matter most. Marvell is a big player in the custom chip market, and it could play a vital role in AI's long-term growth, especially as customers look for alternatives beyond just Nvidia's chips.
While Marvell's stock performance looks horrendous this year, I don't think growth investors should give up on the stock by any means. It may not be the flashiest AI stock to own, but it could make for an underrated buy in the years ahead, given its modest valuation and continually strong growth prospects.
