Marvell’s stock slumps on concerns over custom silicon, but long-term prospects look strong – News

Marvell Technology Inc. could only match Wall Street’s expectations on earnings and revenue as it delivered its latest financial results today, and followed with soft guidance for the current quarter. Predictably, its stock took a nosedive in extended trading, falling more than 11%.

The computer server chipmaker reported second-quarter earnings before certain costs such as stock compensation of 67 cents per share, exactly in line with the analyst’s consensus estimate. Revenue for the period rose 58% to $2.01 billion, but that too, was only in line with Wall Street’s targets.

The rising revenue meant Marvell was able to boost its bottom line, reporting net income for the quarter of $194.8 million, up from just $177.9 million in the year-ago period.

Marvell Chief Executive Matt Murphy (pictured) told analysts that the $2.01 billion in revenue was a new record for the company, and said he expects that number to continue growing in the current quarter. He also anticipates growth in earnings and an expansion in its profit margins. “Marvell’s growth is being fuelled by strong AI demand for our custom silicon and electro-optics, as well as a significant increase in the pace of recovery in our enterprise networking and carrier infrastructure end markets,” Murphy said.

Looking to the current quarter, Marvell set its revenue guidance at $2.06 billion at the midpoint of its range, trailing Wall Street’s forecast of $2.11 billion.

Marvell was once seen as one of the most promising bets outside of Nvidia Corp. in the artificial intelligence chip industry, but although it has grown its business considerably over the last three years, it has failed to live up to expectations this year. Prior to today, its stock was down 18% in the year to date, and today’s after-hours decline only means it has now declined over 30%.

“Despite strong year-over-year growth, the market reaction has been negative in after-hours trading as quarter three revenue guidance came in below Street expectations,” Ethan Feller, an analyst with Zacks Investment Research, told News. “That reinforces the importance of execution in a sector that has quickly become the most closely watched area of the market.”

On a conference call with analysts, Murphy talked about how the company has completed the divestiture of its automotive ethernet business. He said that reorganization gives it greater flexibility to continue its stock repurchases, and invest more capital into research and development. “The divestiture aligns with our strategy to focus the company on what we expect to continue to be a massive AI opportunity in front of us, by purposefully redirecting our investments towards data center, relative to our other end markets,” Murphy explained.

Murphy stressed the importance of ongoing investment in the data center business, as it now accounts for three-quarters of the company’s total revenue. The company is reorganizing its remaining business units to reflect that, and beginning this quarter, it plans to consolidate all non-data center markets into a single end market.

Weakness in custom silicon

The CEO then turned to face questions over the company’s guidance, and told analysts that growth in its custom silicon business is expected to be flat in the current quarter, before “substantially” improving in the fourth quarter.

Marvell’s custom silicon business involves making customized server chips to order for hyperscale data center operators such as Amazon Web Services Inc. The company makes a ton of cash by helping AWS design and manufacture its “Trainium” chips for artificial intelligence workloads, and it’s also thought to be working with the likes of Google Cloud and Microsoft Corp. too, though it hasn’t said so publicly. The Trainium chips compete with Nvidia Corp.’s graphics processing units, which are the most popular silicon for running AI workloads today.

When pressed about the soft guidance for the custom silicon business, Murphy insisted that periodic setbacks of this nature are “not unusual”. He added that the company’s optics business is expected to grow significantly in the current quarter, which will help to ensure its continued overall revenue growth.

Feller told News that investors are likely concerned about the weakness in the custom silicon business, because AI remains the centerpiece of Marvell’s growth strategy. He pointed to a statement from Murphy that Marvell’s design teams are currently engaged with “over 50 new opportunities” involving more than 10 customers. “This underscores the company’s aggressive pivot to AI-focused custom silicon, while its networking and cloud infrastructure businesses continue to provide complementary exposure [to AI],” Feller said.

Although the value of Marvell’s stock has dwindled, Feller believes it remains an enticing opportunity for investors at 27-times forward earnings. This means it’s trading at a “meaningful discount” compared to many of its AI chip industry peers, he said.

“The near-term revenue guidance is a disappointment, and does raise legitimate concerns, though the long-term growth story appears to be intact,” Feller said. “It has been a challenging year for Marvell’s stakeholders, but we believe the market will reward investors over the next 12 to 18 months as Marvell executes on its AI strategy and continues expanding its share in custom silicon.”

Photo: Marvell Technology