Just before the shares of NVIDIA Corporation (NVDA)got their moonshot post its earnings release on May 24, we discussed how the race to dominate the AI domain is gaining pace. In this article, we will look at another bus to that to which investors are rushing to hop on board: Marvell Technology, Inc. (MRVL).
While NVDA has clearly stolen the thunder over the past week by becoming the first semiconductor company to reach a trillion-dollar valuation, MRVL’s stock also hogged headlines. It surged by 32% after it surpassed top and bottom line estimates in the first quarter of fiscal year 2023, according to its May 25 earnings release.
However, given that the supplier of data infrastructure semiconductor solutions also witnessed 8.7% and 41.1% year-over-year declines in its quarterly revenue and non-GAAP net income to $1.32 billion and $264.2 million, respectively, it was not past performance, but the company’s bullishness regarding its future prospects that got reflected in the stock’s remarkable price action.
While informing analysts that the company had begun to reassess the “tremendous” business potential of AI, MRVL’s CEO Matthew Murphy said, “In the past, we considered AI to be one of many applications within cloud, but its importance and therefore the opportunity has increased dramatically.”
MRVL’s favorable position to capitalize on the tailwind of increasing investments in AI originates in two acquisitions, which, in hindsight, have turned out to be key.
The first of them was a 2019 acquisition of Avera Semi, a spinout of Global Foundries, which contributed to MRVL’s custom chip designing and large-scale Application-Specific Integrated Circuit (ASIC) computing capabilities.
This was followed by a 2020 acquisition of Inphi, which had built a leading high-speed data interconnect platform uniquely suited to meet the insatiable demand for increased bandwidth and low power for both AI Clusters and traditional cloud infrastructure.
However, what was already a growing market share took a quantum leap late last year with the release of ChatGPT, which marked an inflection point for generative Artificial Intelligence (AI) and Large Language Models (LLMs).
With AI, if it isn’t already there, becoming a ubiquitous force majeure that’s touching and shaping every aspect of our modern lives, the traditional ratio of conventional processing through CPUs to accelerated computing through GPUs of 95% to 5% is destined to get inverted with the former component finding greater usage for control than execution.
Moreover, with the ever-increasing adoption of AI, the demand for increased computing power would drive demand for high-speed networking technology and optical productivity, which has been MRVL’s forte.
With triple levers of accelerated computing, data center usage, and high-speed networking to bank on, MRVL was able to quantify its revenue from AI during its recent earnings call. According to a note from Citi’s Atif Malik, “In FY2023, MRVL estimated its AI revenue to be ~ $200 million, representing a strong uptick from FY22. The company expects AI sales to reach ~$400M+ in FY24 before doubling in FY25.”
Bottom Line
According to Bill Gates and a few notable others, we overestimate change in the short term and underestimate it in the long term.
The company's lack of meaningful share repurchases during the previous quarter, despite its clear visibility on stellar growth prospects, makes us wonder if the glowing outlook was a signal to investors or noise to mask top and bottom-line declines.
However, from the perspective of both the current business and the pipeline of opportunities, the substance behind the hype is undeniable.
Hence, since we may be at the beginning of a 10-year cycle of AI-driven semiconductor growth, it could be wise for investors to load up on the stock once the current wave of excitement ebbs and there’s more valuation comfort to buy in for the long haul.
