Marvell Technology at a critical pivot: 30% upside is possible

Key Points

• Marvell Technology is at a critical inflection point with a return to growth in the forecast. 
• AI strength offsets legacy weakness and AI is accelerating. 
• Analysts trim their targets but still see a robust upside for this market. 

Marvell Technology’s NASDAQ: MRVL stock is at a critical pivot point, trading near critical support in the middle of a trading range. The technical outlook is biased to the downside, but a new low may not be in the cards. While the Q3 results were mixed and the outlook iffy, the business is also at an inflection point. 

Softness in Marvell’s legacy enterprise network and carrier markets persists and weighs on the outlook but is offset by new business centered on AI. The takeaway is that weak results may persist for another quarter, but growth is back in the forecast. Because the growth is centered on the combined impacts of accelerating AI spending and normalizing core business, Q4 2023 will likely be a watershed event leading to strength in 2024. 

The analysts are trimming their stock price targets for Marvell following the Q3 release, providing a headwind for the market. However, the chatter is bullish, and the activity is dialing back on expectations that still see a robust upside for the market. Not only is the consensus figure still trending higher compared to last quarter and last year despite the downward revisions, but it implies more than a 30% upside for the market, and most of the freshest targets bracket the consensus in a tight range. 

Normalizing business offset by robust growth in AI

Marvell had a mixed quarter, with every negative offset by a positive pointing to sustained value creation for shareholders. The company’s revenue of $1.42 billion is down 7.8% compared to last year, beating the consensus estimates by 150 basis points due to diversification. 

The non-AI business segments were all weak but offset by the AI portions, which not only grew but are forecasted by management to accelerate in Q4. The data center, the heart of the AI-centric offerings, is up 21% YOY and will underpin results in the coming quarter with an expected 35% growth. Because AI is all about data centers and the cloud, the company should sustain high-level DC business growth over the next several years. 

The margin details are among the best in the report. The company’s margin deleverage significantly due to the downshift in business but much less than expected. The net result is adjusted earnings of $0.41, flat compared to last year and nearly $0.50 better than expected. Looking forward, the company expects to see revenue flat sequentially and compared to last year with a significant sequential improvement in margin. The adjusted gross margin is expected to widen by about 1000 basis points to keep earnings flat as well. 

Institutions raise the stakes for Marvell Technology 

Marvell Technology's institutional activity is interesting because it has been bullish on balance all year and coincides with a bottoming in the price action. Institutions purchased more than $8 billion on balance in 2023, worth about 20% of the market cap, with most of the buying in the year's first half. That activity helped to put the bottom in the market, and now support is evident at a higher level. The AI-inspired spike in price action has retraced to show support near $50, a 25% increase, and is now setting up for its next move. 

The analysts and institutional activity suggest the sell-side side will buy the dip in these shares. Assuming they do, this market should continue consolidating near $50. In this scenario, the market should move sideways near current levels and may move higher within its established trading range. If not, shares of Marvell Technology could move below $50 with the possibility of testing support near $47.50 or as low as $40. A move below $40 is not expected for this Top Rated Stock without significantly changing the economic and fundamental outlook.