Concentrated Data Center Revenue Will Amplify Long-Term Risks

Key Takeaways

• Heavy reliance on the data center market and hyperscaler internal chip development threaten both Marvell's revenue stability and long-term growth prospects.
  
• Persistent high expenditures, regulatory risks, and industry cyclicality are likely to pressure margins, profits, and overall resilience.
  
• Marvell is capitalizing on strong growth in data center and AI markets, improving margins and diversification, while strategic divestitures provide capital to fuel further expansion and shareholder returns.

Catalysts

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

• Marvell's overwhelming concentration of revenue in the data center market-now 74% of total company revenue and rising-exposes the company to heightened earnings risk in the event that global data center and cloud infrastructure demand plateaus or slows following the current AI-driven boom. This lack of end-market diversification, especially after divesting the automotive Ethernet business, makes future revenue streams more volatile and less resilient.
  
• The ongoing trend of hyperscale cloud providers investing in internal silicon development for AI acceleration and networking infrastructure is narrowing the addressable market for merchant silicon supplied by companies like Marvell, which will likely stunt long-term revenue growth and diminish the sustainability of gross margin expansion.
  
• Massive, ongoing capital expenditure and R&D spending are needed to keep pace with rapidly evolving technology and leading-edge customer requirements. This persistent expense requirement will likely weigh on net margins and overall earnings growth in future cycles, particularly if acquired design wins do not translate to proportional revenue.
  
• Rising geopolitical tensions, evolving environmental regulations, and potential trade barriers threaten to increase Marvell's operational and compliance costs, disrupt supply chain continuity, and limit access to international markets. These factors are poised to depress both operating margins and topline growth over the long term.
  
• The semiconductor industry's inherent cyclicality and the mounting threat of inventory gluts-exacerbated by intense competition from low-cost international fabless providers-will contribute to sharp, unexpected fluctuations in pricing power, sales volumes, and ultimately Marvell's profit margins.

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 13.4% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -1.4% today to 19.6% in 3 years time.
• The bearish analysts expect earnings to reach $2.1 billion (and earnings per share of $2.44) by about September 2028, up from $-103.4 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 32.9x on those 2028 earnings, up from -519.5x today. This future PE is greater than the current PE for the US Semiconductor industry at 29.7x.
• Analysts expect the number of shares outstanding to decline by 0.47% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.42%, as per the Simply Wall St company report.

Marvell Technology Future Earnings Per Share Growth

Risks

• Marvell is experiencing robust and sustained growth in its data center and AI-related businesses, with record revenue of $2.006 billion in the most recent quarter, a 58% year-over-year increase, and continued design win momentum in custom silicon for hyperscale cloud and AI, which is likely to drive both revenue and earnings growth in the coming years.
  
• The company has outlined a growing total addressable market for data center silicon, increasing its target from a $33 billion TAM to a $94 billion TAM by 2028 and expects to grow market share from 13% to 20%, indicating a large, long-term secular opportunity that can fuel top-line expansion and gross margin improvement.
  
• Marvell's successful divestiture of its automotive ethernet business for $2.5 billion in cash gives it significant capital flexibility to reinvest in higher-growth AI and cloud markets, accelerate share buybacks, or pursue strategic acquisitions, all of which can support higher earnings per share and return on capital.
  
• The company has demonstrated strong operating leverage, with non-GAAP earnings per share growing 123% year-over-year, far outpacing revenue growth, and operating margin expansion of 870 basis points; if this trend continues, it provides a powerful driver for long-term net income and shareholder value.
  
• There is significant recovery and growth potential in enterprise networking and carrier infrastructure, as evidenced by a sequential 30% projected revenue increase and an anticipated long-term annualized run rate of $2 billion, which can help to further diversify revenue streams and reduce reliance on any single end market, thus supporting more stable long-term financial performance.

Valuation

• The assumed bearish price target for Marvell Technology is $59.41, which represents two standard deviations below the consensus price target of $86.1. 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 $122.0, and the most bearish reporting a price target of just $58.2.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $10.5 billion, earnings will come to $2.1 billion, and it would be trading on a PE ratio of 32.9x, assuming you use a discount rate of 10.4%.
  
• Given the current share price of $62.31, the bearish analyst price target of $59.41 is 4.9% lower. The relatively low difference between the current share price and the analyst bearish price target indicates that they believe on average, the company is fairly priced.
  
• 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.