Why Marvell Stock Jumped 10% On Friday

Marvell Technology (NASDAQ:MRVL), a semiconductor company specializing in integrated circuits tailored for the data center space, saw its stock jump by 10% in Friday’s trading amid optimism about demand for the company’s custom AI chips. While Marvell stock is up by almost 2x this year, the recent rally comes as fellow semiconductor player Broadcom guided that sales of its AI products would grow by 65% in the first quarter. Broadcom’s AI business focuses on networking chips and custom AI accelerators, very similar to Marvell’s AI initiatives, and some of this optimism appears to have rubbed off on Marvell’s stock as well. So why is demand for custom AI chips looking up and what does it mean for Marvell stock?

What Are Custom AI Chips?

Marvell’s entry into the AI space was led by its interconnect solutions for data centers. The bigger opportunity for the company has been developing application-specific integrated circuits (ASICs) that can be used as custom AI chips. These chips are tailor-made for hyperscaler data centers and offer some advantages over GPUs. By focusing on more targeted functionalities, specialized chips can reduce costs compared to general-purpose GPUs, which are meant to work on a wide set of applications and data. Energy efficiency can also be improved, while performance can also be optimized better compared to the general-purpose GPUs provided by the likes of Nvidia and AMD. Separately, if you want upside with a smoother ride than an individual stock, consider the High Quality portfolio, which has outperformed the S&P, and clocked >91% returns since inception.

Marvell’s Recent Progress

Marvell has been expanding its partnerships with key AI players, including Amazon Web Services, which recently expanded deals with the company for data center semiconductors, including custom AI products. Other players such as Google and Microsoft could also emerge as large customers, as they seek alternatives to Nvidia’s current monopoly over the AI compute space. The company says that its AI-related revenue for this year will exceed $1.5 billion, and has set a goal of $2.5 billion for the next year. Given its growing traction with hyperscalers, its expanding product portfolio, and the recent guidance from Broadcom, Marvell may well surpass these estimates.

The increase in MRVL stock over the last 4-year period has been far from consistent, with annual returns being considerably more volatile than the S&P 500. Returns for the stock were 85% in 2021, -57% in 2022, and 64% in 2023. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, is considerably less volatile. And it has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment around rate cuts and multiple wars, could MRVL face a similar situation as it did in 2022 and underperform the S&P over the next 12 months – or will it see a strong jump?

Why The Outlook Is Bright

As companies prioritize generating better returns on AI investments, they may become more judicious with spending on pricey Nvidia GPUs. Big companies could seek alternatives and Marvell’s specialized chips could be a top choice for hyperscalers. Moreover, companies have invested heavily in AI model training, but this is a one-time affair that has significantly benefited Nvidia due to its cutting-edge GPUs. As AI models grow larger, incremental performance gains may diminish, and the availability of high-quality training data could become a bottleneck. The market could potentially shift from large-scale general-purpose AI models to smaller, specialized ones, potentially helping more niche players like Marvell, who offer tailored products that optimize costs and performance for specific applications. See how a shifting AI market could put Nvidia at a disadvantage in Sell Nvidia, Buy Intel Stock?

[1] Returns as of 12/16/2024
[2] Cumulative total returns since the end of 2016

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