Co-Packaged Optics Will Transform Future AI Data Centers

Key Takeaways

• Strong AI demand and custom AI silicon ramp-up are expected to significantly boost revenue and exceed AI targets, enhancing overall growth.
  
• Introduction of cutting-edge technology and strategic restructuring are poised to improve margins, open new revenue streams, and drive long-term earnings and EPS growth.
  
• Heavy reliance on data center revenue, inventory management issues, and dependency on few key customers could threaten Marvell's growth and profit margins amidst technological shifts.

Catalysts

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

• Marvell's data center end market is experiencing rapid growth due to strong AI demand, with custom AI silicon programs ramping to high-volume production, which is expected to significantly boost revenue.
  
• The company anticipates exceeding its $2.5 billion AI revenue target in fiscal 2026, driven by continued adoption of their high-performance products, influencing overall revenue growth.
  
• Marvell plans to introduce advanced technologies such as the industry's first 3-nanometer 1.6T DSP this year, aiming to cut power consumption in optical modules by 20%, which should bolster net margins through efficiency improvements.
  
• The ongoing development of co-packaged optics and next-generation interconnect technologies is projected to open up new revenue streams as the optical transition in AI data centers expands, enhancing long-term earnings potential.
  
• Marvell's strategic organizational restructuring and targeted investment in custom and hyperscale data center solutions aim to capitalize on market opportunities and are expected to drive revenue and EPS growth by fully leveraging their semiconductor technology leadership.

Marvell Technology Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Marvell Technology's revenue will grow by 22.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from -7.6% today to 21.0% in 3 years time.
• Analysts expect earnings to reach $2.5 billion (and earnings per share of $2.72) by about August 2028, up from $-491.5 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $1.9 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 41.9x on those 2028 earnings, up from -130.3x today. This future PE is greater than the current PE for the US Semiconductor industry at 30.7x.
• Analysts expect the number of shares outstanding to decline by 0.46% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.4%, as per the Simply Wall St company report.

Marvell Technology Future Earnings Per Share Growth

Risks

• The significant reliance on the data center end market poses a risk, as it accounted for 75% of Marvell's revenue in the fourth quarter. A downturn in data center spending or technological shifts could negatively impact future revenue and growth.
  
• The company's sizable increase in inventory to support growth, without a corresponding short-term revenue growth forecast, could indicate potential inefficiencies in inventory management or overestimation of demand, impacting future net margins.
  
• The dependence on a limited number of hyperscale customers for custom silicon programs may lead to volatility in revenue, especially if competitor offerings gain favor or if Marvell fails to secure follow-on custom design wins.
  
• Changes in customer architectures or shifts from passive to active or optical interconnects (e.g., co-packaged optics) involve heavy investment in new technologies that may not yield immediate returns and could pressurize earnings if widespread adoption is delayed.
  
• The company's significant debt level, highlighted with a gross debt of $4.06 billion, poses a risk if interest rates rise or if cash flows do not grow as anticipated, potentially affecting future profit margins.

Valuation

• The analysts have a consensus price target of $90.819 for Marvell Technology based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $133.0, and the most bearish reporting a price target of just $64.31.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $11.8 billion, earnings will come to $2.5 billion, and it would be trading on a PE ratio of 41.9x, assuming you use a discount rate of 10.4%.
• Given the current share price of $74.26, the analyst price target of $90.82 is 18.2% 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.