Custom AI Silicon Programs Will Redefine Data Center Technology

Key Takeaways

• Strategic realignment towards AI and data center products is expected to drive substantial revenue and market share growth.
  
• Advanced technology investments position Marvell to leverage AI demand, enhancing revenue and earnings prospects.
  
• Dependence on hyperscale customers, modest margins, and exposure to manufacturing risks could lead to revenue volatility and constrained growth for Marvell Technology.

Catalysts

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

• Marvell's custom AI silicon programs, which are ramping to high-volume production, are expected to drive substantial growth and significantly exceed their $2.5 billion revenue target in fiscal 2026, boosting overall revenue.
  
• The introduction of advanced products like the industry's first 3-nanometer 1.6T DSP promises improved efficiency, which could enhance demand and expand market share, thereby improving future revenues and net margins.
  
• Marvell's success in winning and ramping custom silicon programs, including partnerships with major hyperscalers, is expected to yield continuous revenue growth through fiscal years 2026 and 2027.
  
• Continued investment in technology platforms, such as advanced process nodes, die-to-die interconnects, and co-packaged optics, positions Marvell to capitalize on emerging AI data center demand, potentially increasing earnings and market share.
  
• The strategic realignment to focus on data center products, coupled with robust AI demand, is projected to drive significant year-over-year revenue growth, contributing to expanded net margins and earnings.

Marvell Technology Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Marvell Technology compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Marvell Technology's revenue will grow by 29.8% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from -15.3% today to 23.1% in 3 years time.
• The bullish analysts expect earnings to reach $2.9 billion (and earnings per share of $3.45) 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 bullish analyst cohort, the company would need to trade at a PE ratio of 49.3x on those 2028 earnings, up from -52.2x today. This future PE is greater than the current PE for the US Semiconductor industry at 23.2x.
• 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 9.2%, as per the Simply Wall St company report.

Marvell Technology Future Earnings Per Share Growth

Risks

• The reliance on a few major hyperscale and cloud customers for the custom silicon programs carries a significant risk of revenue volatility if any competitor takes market share or if there are changes in customer relationships or market dynamics, potentially impacting Marvell's future revenues.
  
• The consumer end market is experiencing sequential declines, and projected revenue from this segment is expected to remain flat at approximately three hundred million dollars annually, which could impact overall revenue growth diversification.
  
• The data center end market is highly dependent on demand from AI and cloud, with a seasonal sequential decline in the on-premise portion expected, which may affect revenue stability and growth projections.
  
• Despite substantial operating leverage, Marvell's GAAP operating margin remains modest and its non-GAAP operating expenses are increasing, which could constrain net margins if revenue growth does not keep pace.
  
• There is exposure to manufacturing and development risks, especially in advanced process nodes like two-nanometer technology and the adoption of complex technologies like co-packaged optics, which could lead to increased R&D expenses and delay in achieving economies of scale, affecting earnings and margins.

Valuation

• The assumed bullish price target for Marvell Technology is $127.37, which represents one standard deviation above the consensus price target of $108.35. 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 bullish 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 bullish analysts, you'd need to believe that by 2028, revenues will be $12.6 billion, earnings will come to $2.9 billion, and it would be trading on a PE ratio of 49.3x, assuming you use a discount rate of 9.2%.
  
• Given the current share price of $53.32, the bullish analyst price target of $127.37 is 58.1% 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.