50% Upside For MRVL Stock?

Forbes

a day ago

CHONGQING, CHINA - MARCH 3: In this photo illustration, the Marvell Technology Inc. logo is ... More displayed on a smartphone screen on March 3, 2025, in Chongqing, China. (Photo by)
Marvell Technology (NASDAQ:MRVL), a firm focused on manufacturing semiconductor integrated circuits for data centers, has recently revealed its Q1 fiscal 2026 results. The company slightly surpassed analyst predictions, disclosing earnings of $0.62 per share on revenues of $1.9 billion, compared to consensus estimates of $0.61 and $1.88 billion, respectively. In spite of this positive outcome, Marvell's stock fell by 3% in after-hours trading and has declined by 43% since the start of the year. A considerable part of this downturn took place in March, following a disappointing outlook. Investors looking for steady returns may want to consider investigating diversified investment options such as the Trefis High Quality portfolio, which has shown remarkable performance, achieving over 91% returns since its inception. Additionally, see – Nvidia Stock's 1 Big Risk
Considering the stock's fluctuations and the recent decline, you might be questioning whether Marvell is currently a good buy. From a valuation perspective, MRVL stock seems appealing. At approximately $62 per share, it is trading at 8.3 times trailing revenues and 32 times trailing adjusted earnings. This is significantly lower than its three-year average price-to-sales (P/S) ratio of 10.4 times and price-to-earnings (P/E) ratio of 42 times.
While a decrease in valuation multiples may appear justified given the company's average revenue growth of only 10% over the last three years and a shrinkage in its adjusted net income margin from 30.5% in fiscal 2023 to 26.3% currently, this does not convey the complete picture.
Marvell's Q1 results demonstrated impressive growth, with overall revenues soaring by 63% year-over-year. This was fueled by a strong 76% rise in core data center sales, reaching $1.44 billion. This increase is largely due to the rising demand for custom AI chips. Although the adjusted gross margin decreased by 240 basis points year-over-year to 59.8%, the company's bottom line witnessed a substantial enhancement, reporting earnings of $0.62 per share, marking a 158% increase from $0.24 in the same quarter last year. In the future, Marvell expects Q2 sales to be around $2.0 billion, which aligns with market expectations.
Building upon the valuation discussion, Marvell is currently experiencing growth at a much quicker rate than it has over the past three years. Analysts estimate that sales are projected to grow by 42% this year and an additional 20% next year. This accelerated growth trajectory is anticipated to have an even greater influence on earnings, which are expected to rise by 2.3 times during this period. This swift growth trend calls for an upward adjustment in valuation multiples. Notably, the average analyst price target of $96 for MRVL indicates a considerable upside potential of more than 50%.
Marvell's strategic foray into the AI sector began with its interconnect solutions for data centers. However, the greater opportunity lies in the creation of application-specific integrated circuits (ASICs), which function as custom AI chips. These tailored chips for hyperscaler data centers offer numerous benefits over general-purpose GPUs, such as those provided by Nvidia and AMD. Specialized chips can lower costs, enhance energy efficiency, and optimize performance for specific functionalities, unlike general-purpose GPUs intended for a wider range of applications. Marvell has been strengthening its alliances with significant AI stakeholders, including Amazon Web Services, which has expanded its agreements for data center semiconductors, including bespoke AI products.
While the valuation of MRVL stock seems enticing, it is essential to take potential risks into account. Historically, Marvell's stock has underperformed in comparison to the broader market during economic downturns. For example, during the inflation shock of 2022, it fell by 62% from its peak, in contrast to a 25.4% decline for the S&P 500. Similarly, amid the COVID-19 pandemic correction in 2020, it dropped by 40% versus a 33.9% decrease for the S&P 500. This trend indicates that MRVL stock is more vulnerable to negative macroeconomic conditions.
In addition, there are ongoing concerns regarding the slow rollout of Amazon's Trainium chips amid weak external demand, which could potentially hinder future revenue growth. Therefore, while Marvell stock might seem attractive from a valuation angle, investors should carefully assess these risks.
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