Marvell Earnings: Accelerating AI Growth and Lingering Market Weakness Lead us to Maintain Valuation

We maintain our $61 fair value estimate for shares of narrow-moat Marvell Technology MRVL after it reported fiscal second-quarter results and fiscal third-quarter guidance in line with our expectations. On the positive side, Marvell materially raised its outlook for artificial intelligence revenue growth this year. On the negative side, the firm pushed out its outlook for recoveries in its data center storage and enterprise networking businesses. We still view fiscal 2024 as a mixed bag, with promising strong growth out of AI partially offsetting downcycles in some of Marvell’s other customer end markets. Long-term, we continue to view Marvell as very well positioned in data center infrastructure and able to benefit from surging AI spending. Shares pulled back after the release, we think due to pushed-out recoveries in storage and enterprise markets. We now see shares as undervalued.

Fiscal second-quarter sales rose 1% sequentially to $1.34 billion, which was still down 12% year over year. Data centers are Marvell’s largest end-market exposure and have been suffering from steep inventory corrections for storage drives which limit Marvell’s sales and drove a year-over-year decline of 29%. Marvell’s optical portfolio has been gaining steam in fiscal 2024 as AI data centers require its market-leading optical modules for high-speed connectivity, helping to balance the declines in storage. Marvell’s enterprise networking business is grappling with its own inventory corrections at customers and fell 10% sequentially. The firm’s automotive business continues to benefit from increasing car connectivity and rose 32% year over year and 23% sequentially.

Profit margins improved sequentially but remain far below year-ago levels. Non-GAAP operating margin of 27% was down more than 900 basis points year over year. Still, we anticipate recovering margins through fiscal 2024 and into fiscal 2025 behind recovering volumes, cost controls, and product mix.