Why Marvell Technology Tanked in August

Key Points

• Marvell slightly missed revenue last quarter and guided a tad soft.

• Management attributed the shortfall to "lumpy" deployments of custom AI ASICs from its lead customer.

• Investors sold off the stock given other AI chip companies aren't seeing the same uncertainty.

• 10 stocks we like better than Marvell Technology ›

Shares of up-and-coming AI chip player Marvell Technology (NASDAQ: MRVL) fell 21.8% in August, according to data from S&P Global Market Intelligence.

Marvell held its fiscal second-quarter earnings release on Aug. 28, meeting expectations on the bottom line but missing on the top. Furthermore, a forecast for tepid sequential growth in the current quarter compounded fears over the company's AI chip business.

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The ASIC business is under scrutiny

In the second quarter, Marvell saw revenue grow 58% to just over $2.0 billion, while adjusted (non-GAAP) earnings per share grew 8% to $0.67 per share. That bottom line figure met analyst expectations, while revenue, despite growing a robust 58%, actually fell a bit short.

Marvell's traditional telecom, consumer, and enterprise business are entering an upcycle after several brutal post-COVID years. Meanwhile, the red hot data center group, which includes the custom ASIC (application specific integrated chip) business and data center networking technology, rallied 69%.

Despite that strong growth, it's that very data center segment that appears to be giving investors pause. Management projected revenue for the current quarter to be approximately flat, which was a bit below estimates. Management justified the weak guidance pointing to "lumpy" ASIC revenue, but it did forecast a reacceleration in that business in the fourth quarter. However, the irregular growth is making investors nervous, especially as rival Broadcom (NASDAQ: AVGO) doesn't appear to be having similar issues.

One analyst asked about competition from Tawian's AIchip technologies, which some fear may be taking market share from Marvell's core ASIC customer, Amazon (NASDAQ: AMZN). CEO Matt Murphy gave an answer that was optimistic about the business long-term, but also didn't specify the competition from that specific customer.

Image source: Getty Images.

Were investors too harsh?

Marvell has traded expensively in the past, but after its recent plunge, Marvell's stock now trades at a more reasonable 23.5 times this year's adjusted earnings estimates.

As a plus, the more attractive AI-oriented data center segment now makes up about 75% of Marvell's business. The downside is that if any competition or margin concerns creep into that business, investors will flock to seemingly safer picks in the space. It appears Marvell will have to prove itself with future AI-related growth to turn the mood around.

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Billy Duberstein and/or his clients have positions in Amazon and Broadcom. The Motley Fool has positions in and recommends Amazon. The Motley Fool recommends Broadcom and Marvell Technology. The Motley Fool has a disclosure policy.