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Investment summary
My recommendation for Marvell Technology (NASDAQ:MRVL) is a buy rating. I believe the worst of the cycle is over for MRVL, and it should start to enter the upcycle as early as 2H25, which should drive strong growth acceleration in FY26. Over the long term, I am also bullish on MRVL’s ability to continue growing its data center business, as it has a leading position in the 800g PAM4 optics solution, which has been a key driver in its ability to win more AI deals.
Business Overview
MRVL is a supplier of a wide range of semiconductor-related technology, such as controllers for hard disk drives (HDDs) and solid-state drives (SSDs), Ethernet switches, processors, and ASICs for data centers, etc. MRVL also develops integrated hardware platforms along with software that incorporates digital computing technologies designed and configured to provide an optimized computing solution. Like many companies in the semiconductor industry, financials have been cyclical, going through three cycles over the past 10 years (the latest downcycle started in FY24). In each down period, revenue declined sharply, with the EBIT margin going negative. In the latest quarter, MRVL reported 4Q24 revenue of $1.43 billion, where Data Center reported revenue of $765 million, Carrier Infrastructure reported revenue of $170 million, Enterprise Networking reported revenue of $265 million, Consumer reported revenue of $144 million, and Auto/Industrial reported revenue of $82 million. Total revenue saw growth of 1% sequentially and annually, providing hopes for a turnaround in FY25. Adj gross margin also saw positive acceleration by 330 bps sequentially to 63.9%, with EBIT margin improving from 33.1% to 33.8%.
Cloud infrastructure is driving long-term growth.
I take the 4Q24 sequential and annual revenue and profit growth as a positive indication that the worst is over for this downcycle, and hence, my focus is on the drivers that will support MRVL’s growth in the next upcycle and over the long term. The main secular tailwind I see today is cloud infrastructure and AI, or, in other words, MRVL’s Data Center business, which has shown tremendous resilience and performance in 4Q23, growing 38% sequentially and 54% annually to $765 million. AI was a key driver in the quarter, led by MRVL’s leading position in the 800G PAM4 solution, which I expect to continue placing MRVL’s in a good position to compete for deals. There are several visible growth catalysts that support strong performance in the next 1 or 2 years (note that all these will only start contributing revenues at the end of FY25, setting up a good base for FY26):
- The next generation of 200G per lane and 1.6T PAM4 solutions from MRVL have started to be qualified by customers, and first deployments are expected to begin by the end of this year, according to management.
- Additionally, the management plans to increase the implementation of PAM4 DSPs for AECs and anticipates shipping products to a number of Tier 1 cloud customers this year.
- The next-generation 51.2T switch from MRVL is expected to be shipped later this year.
- Management also expects to see a positive uplift from increased investment in inferencing. Notably, MRVL is experiencing high demand for its 800G DCI products, the next generation, and is presently shipping 400G DCI products in large quantities. And with the expansion in DCI customer base with design wins at multiple data center customers, revenue contribution from the 800G DCI products will only likely ramp up next year.
Another way to get a sense of the growth runway for MRVL in the AI space is that AI is currently at the level of “more than 10%” of FY24 revenue, up from 3% in FY23. In just 1 year, the revenue mix more than tripled and has a run rate revenue of $800 million ($200 million in 4Q24), driven mostly by MRVL’s optics solution. My view is that the need for AI is not going to see any form of slowdown; in fact, I expect to see an acceleration moving forward as businesses around the world compete to have the best AI capabilities. To achieve this, the backbone (data storage and management) must keep up at the same pace (or arguably at a faster pace to ensure further development is possible). Hence, I expect MRVL to continue seeing long-term growth in its data center business.
Marvell Technology, Inc. a leader in data infrastructure semiconductor solutions, today announced Spica Gen2-T, the industry’s first 5nm 800 Gbps transmit-only PAM4 optical DSP. Designed for transmit retimed optical modules (TRO modules), Spica Gen2-T can reduce the power consumption of 800 Gbps optical modules by more than 40%1 while maintaining interoperability with conventional optical modules and IEEE 802.3 compliant host devices. MRVL
Apart from AI and data centers, I am also optimistic about MRVL’s cloud custom silicon business, where MRVL is starting to ramp for two customer wins (expects initial shipments in 1Q25) and will exceed the $800 million target run rate by the end of CY2024. There should be no issues for MRVL to hit this given that these designs are on track for a substantial ramp in 2H25 and management has a clear view of demand for both FY25 and FY26.
Other business outlook
As for the rest of the business, while the 1Q25 guidance suggests very bad performance, I took it very positively. Management guided for enterprise networking to be down 40% sequentially (1Q25 to be ~58% below peak); carrier to be down 50% sequentially (1Q25 to be ~73% below peak); and consumer to be down 70% sequentially (1Q25 to be 74% below peak). For reference, these expected declines are the bigger sequential decline that MRVL is expected to see over the past 4 years, which tells me the negative demand/supply situation is coming to an end, and MRVL should see a strong recovery in demand soon. One good data point of a turnaround is that storage has already started to see a strong recovery.
We also benefited from higher sequential demand for our storage products as that portion of our data center end market continues its recovery. Revenue from our Teralynx Ethernet switches also grew sequentially in the quarter. 4Q24
Valuation
Redfox Capital Ideas
I model MRVL using a forward revenue multiple approach, and using my assumptions, I believe MRVL is worth $86.34. In my opinion, MRVL is going to see massive growth acceleration ahead as it goes into the next upcycle, mostly likely in FY26, as FY25 is still going to see lingering impacts from the downcycle in some of the business units in 1Q25 (as mentioned above). It is hard to pinpoint the exact recovery trajectory, but my assumption is that FY25 will see a 3% decline, which is a decline of a small magnitude (2H25 starts to see some form of recovery, offset by the weak performance in 1Q25). FY26 should see a strong acceleration, which I estimate to be ~30% based on the average past few cycles performance (FY11 saw 28% growth, FY19 saw 19% growth, FY22 saw 50% growth). In an upcycle, MRVL should trade at an elevated multiple given the stronger growth rates. At the current 11.5x forward revenue multiple, this is ~2.5x off the peak in FY21 and ~3x above the average. My thinking is that multiples could surge to the previous peak if MRVL shows stronger than expected growth, but I think the current 11.5x better reflects my 30% growth expectation as consensus is expecting the same too (FY25 growth of 29.9%).
Risk
Although I expect a recovery in the near term, the exact timing of the inflection and the pace of recovery will be difficult to pinpoint. While historical data points do help in forecasting, they are not guaranteed to be accurate. MRVL could very well see several more quarters of slowdown, especially if the global macroeconomy sees further strain from rates staying higher for longer, increasing the cost of capital for businesses, thereby restraining budget capacity for investments.
Conclusion
My view for MRVL is a buy rating. MRVL appears to be nearing the end of the current downcycle, and I expect MRVL’s leading position to continue positioning it well to capitalize on the long-term growth in AI and cloud computing (the Data Center business). While the near-term outlook for some business units remains weak, I would expect a strong rebound in the latter half of FY25. The risk lies in the exact timing and pace of the recovery, which could be impacted by macroeconomic factors.
