AI And Custom Silicon Programs Will Empower Data Center Evolution

Key Takeaways

• Heavy reliance on AI and custom silicon growth may not meet expectations due to market competition and saturation, affecting revenue.
  
• Negative margins and limited visibility into non-GAAP targets may undermine earnings and investor confidence, despite strong cash flows.
  
• Heavy dependence on custom silicon clients and focus on AI and cloud expose Marvell to contract risks and revenue volatility, potentially impacting earnings and margins.

Catalysts

Provides data infrastructure semiconductor solutions, spanning the data center core to network edge.

• Marvell Technology's growth trajectory in the data center market is heavily reliant on the ramp-up of AI and custom silicon programs, which may not meet expectations due to potential customer competition and market saturation, impacting future revenue growth.
  
• While Marvell is experiencing strong growth in AI and cloud revenues, the sequential increase in data center revenue is expected only in the mid-single digits, which could indicate a deceleration in momentum impacting future revenue projections.
  
• The company's optimistic projection of surpassing the $2.5 billion AI revenue target in fiscal 2026 is speculative and could fail to meet expectations if market conditions or customer demands falter, influencing revenue outcomes.
  
• Although Marvell is driving sequential growth in enterprise networking and carrier infrastructure, their expectation of high single-digit declines in the automotive and industrial end markets may signal vulnerabilities in broader market dynamics, impacting overall revenue.
  
• Despite strong operating cash flows and capital returns, a negative GAAP operating margin and loss per diluted share in fiscal 2025, along with limited visibility into achieving non-GAAP operating margin targets, could undermine earnings and investor confidence.

Marvell Technology Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Marvell Technology compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Marvell Technology's revenue will grow by 20.6% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -15.3% today to 22.7% in 3 years time.
• The bearish analysts expect earnings to reach $2.3 billion (and earnings per share of $2.6) by about April 2028, up from $-885.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 44.5x on those 2028 earnings, up from -51.7x today. This future PE is greater than the current PE for the US Semiconductor industry at 24.0x.
• Analysts expect the number of shares outstanding to grow by 0.06% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.14%, as per the Simply Wall St company report.

Marvell Technology Future Earnings Per Share Growth

Risks

• The company's reliance on a small number of custom silicon clients, such as hyperscalers, may increase vulnerability to losing major contracts or customer shifts, potentially impacting future revenue streams.
  
• The focus on AI and cloud revenue, which constitutes a significant part of Marvell's business, means the company is exposed to volatility in AI investment cycles and hyperscale spending, potentially affecting revenue stability.
  
• Despite strong current demand, the anticipated transition from traditional connectivity to optical solutions like co-packaged optics carries execution and adoption risks, which might affect the margin if the transition does not match company timelines.
  
• The substantial operating leverage reported comes with increased pressure to maintain high growth rates; any shortfall or slow ramp-up in AI-related businesses could negatively impact earnings growth and margins.
  
• Inventory management shows an increase, indicating expectations for continued high demand; however, if market conditions change, this could lead to an excess inventory situation, potentially affecting net margins and earnings.

Valuation

• The assumed bearish price target for Marvell Technology is $90.85, which represents one standard deviation below the consensus price target of $109.9. This valuation is based on what can be assumed as the expectations of Marvell Technology's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $140.0, and the most bearish reporting a price target of just $60.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $10.1 billion, earnings will come to $2.3 billion, and it would be trading on a PE ratio of 44.5x, assuming you use a discount rate of 9.1%.
  
• Given the current share price of $52.87, the bearish analyst price target of $90.85 is 41.8% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.