Marvell Shares Gap Down: Is AI Sentiment Changing?

Shares of Marvell Technology Inc. NASDAQ: MRVL gapped down on August 25 after the chipmaker beat views and issued guidance in line with analysts’ views.

In addition, Wall Street still believes in the company’s AI-related sales and earnings potential. 

You read all that correctly. The company did everything right, but still got punished.

Here’s the problem: The stock ran up 55.16% year-to-date and 24.73% in the past three months. That’s not exactly Nvidia Corp. NASDAQ: NVDA numbers, but Wall Street expected more after that rally.

Is it possible that the growth case for AI is settling down to something more reasonable, after nearly a year of mania? 

Marvell earnings came in at 33 cents a share, down 42% from the year-earlier quarter, but as you can see using MarketBeat’s Marvell Technology earnings data, that came in ahead of views. Revenue of $1.34 billion also edged out expectations, despite being 12% lower than last year’s second quarter.

Company Expects More Revenue Increases 

Revenue came in above the midpoint of the company’s guidance, and Marvell is forecasting sequential revenue growth will accelerate in the third quarter.

“This growth is being driven primarily by AI and cloud infrastructure," said Matt Murphy, Marvell's Chairman and CEO, in the earnings release.

He added that demand from AI applications continues to strengthen, meaning the company is upping its overall AI revenue outlook. 

“Our strategy to focus on data infrastructure across a diverse set of end markets is serving us well despite the backdrop of a softening macro environment,” he added.

Marvell makes chips and other gear for data centers, networking, storage, and 5G applications. Customers also hail from the consumer electronics and the automotive and industrial markets. 

Growth Driven By AI Demand

In the earnings conference call, Murphy noted that the quarterly revenue beat was primarily driven by demand from AI applications growing faster than the company’s prior forecast.

In the call, he also addressed forecasts for the current quarter. The company expects sequential revenue growth from the overall cloud category to accelerate, driven by continued strong growth from Cloud AI, as well as standard cloud infrastructure. 

“Demand for our AI products continues to grow at an extraordinary rate, and we are working very closely with our customers to meet their rapidly evolving needs,” Murphy added.

On the other hand, he noted, sales of on-premise enterprise hardware are expected to continue to trend down. The company projects overall data center revenue in the third quarter to grow in the mid-teens sequentially, on a percentage basis.

On-Premise Enterprise Sales Slowing

Marvell isn’t the only company pointing out the trend away from on-premise enterprise hardware, and toward cloud infrastructure gear. 

In May, Insight Enterprises Inc. NASDAQ: NSIT, an Arizona-based distributor of info tech hardware, noted the same trend when it reported first-quarter results. 

So where does that leave Marvell?

Wall Street seems a bit torn on the question of AI growth these days. On the one hand, Nvidia shares rose after the company blew out second-quarter views, as you can see on MarketBeat’s Nvidia earnings page.

Post-Earnings Price Increases More Subdued

But unlike the previous two quarters, when the earnings report resulted in Nvidia shares gapping up at double-digit rates, shares only climbed 0.10% the day after the release.

Although Marvell, Nvidia and other companies are showing that sales of gear to facilitate generative AI are on the rise, Wall Street seems to be realizing that AI is a long-term phenomenon, rather than a flash in the pan. In fact, there may be a shift toward waiting for actual results, rather than snapping up shares just on anticipation.

Marvell’s price-to-earnings ratio is still rich, at 34, although nowhere close to Nvidia’s P/E of 90. The latter may be giving some investors pause, but Marvell’s P/E is still in the realm of what’s considered normal for many growth investors, so that’s not likely to put the brakes on investment.

Wall Street Sees Double-Digit Price Growth

In fact, MarketBeat’s Marvell analyst ratings show a consensus of “moderate buy” with a price target of $66.56, an upside of 24.40%. Analysts have the same consensus rating on Nvidia, with a price target of $555.70, an upside of 20.76%, slightly lower than what they expect from Marvell.

The Marvell Technology chart shows the stock falling below the previous floor of $56.39 in its current consolidation with the August 25 gap-down, but that may be the catalyst that offers investors a chance to buy at a lower valuation.