After a strong rally in 2023 and a robust start to 2024, the shares of Marvell Technology Group (NASDAQ: MRVL), a prominent chip designer, have failed to follow the trend of the AI chip stocks surge this year. This unexpected performance has led to questions about Marvell’s situation and the possibility of regaining momentum soon.
Over 70% of Marvell’s revenue in its fiscal first quarter of 2025 (ended in April) comes from data center clients. These clients include big data center operators and companies that manufacture data center servers, allowing Marvell to benefit significantly from the ongoing AI boom within this segment. The AI-focused segment within the data center experienced an impressive 87% increase year over year last quarter, attributing to the overall growth of Marvell’s revenue.
The downside is that despite this growth in the data center division, Marvell’s overall revenue declines continue due to struggles with the other revenue segments, which have faced challenges for nearly two years amidst the bear market. Revenue for the first quarter of fiscal 2025 decreased 12% year over year and is projected to drop another 7% in the upcoming second quarter.
Investors should note that the multitude of acquisitions made to move toward data centers and AI makes Marvell unprofitable using Generally Accepted Accounting Principles (GAAP), although the company retains positive free cash flow. Currently, Marvell’s stock is priced at 53 times trailing 12-month free cash flow, slightly higher than Broadcom, a market leader that has maintained growth in spite of the ongoing bear market.
Analysts anticipate an overall recovery in the semiconductor sales market beginning in the second half of 2024, which may boost underperforming sectors like Marvell. Nevertheless, the author has made the decision to consolidate their holding of Marvell into Broadcom as it has outperformed significantly. For those looking to get exposure to both Marvell and Broadcom, they can consider the broad tech fund Vanguard Information Technology ETF (NYSEMKT: VGT) or the iShares Semiconductor ETF (NASDAQ: SOXX).
Investors thinking of buying stock in Marvell should carefully consider their decision as it has not been recommended by the Stock Advisor analyst team of The Motley Fool. As the tech industry evolves, selecting winners and losers becomes more complex, making diversified exposure to the sector an enticing alternative.
