Is Marvell Stock a Buy After Alphabet and Nvidia Deals?

When it comes to custom ASIC (application specific integrated circuit) technology, Broadcom (NASDAQ: AVGO) has become the leader of the pack. However, Marvell Technology (NASDAQ: MRVL) got a boost when it was reported that the company was set to work with Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG) on some versions of its Tensor Processing Units (TPUs).

Marvell's ASIC business has been a point of consternation with investors. The company is behind Amazon's Trainium chips, but there is a widely held belief that it is set to play a less prominent role in these chips moving forward, with Taiwanese company AIchip taking the lead role. Meanwhile, Microsoft's newer Maia chip has yet to take off, and there were rumors that it could even look to turn to Broadcom for future generations.

Image source: The Motley Fool.

That said, Marvell has discussed having custom chip design wins with more than 20 customers. It also relatively recently signed a five-year deal with Amazon to supply it with custom AI chips and optical components. This new deal with Alphabet, if consummated, will surely help ease any investor fear over this business.

Alphabet is not replacing Broadcom as the main co-developer of its core TPUs, as the two companies just extended their partnership by another five years. However, Marvell would help Alphabet develop a memory processing unit that would work besides its TPUs, and another TPU to help with inference.

Marvell is about more than just ASICs, however. The company has a very strong optical connectivity business, especially with interconnects, that is growing quickly with the rise of AI data centers. The company expects to grow its total revenue this year by 30%, with a 40% jump in its data center business and a 50% surge in its interconnect business.

Earlier this month, the company received a $2 billion investment from Nvidia to collaborate on silicon photonics and let Marvell's custom chips work with its NVLink ecosystem. NVLink has been a proprietary system, so this is a nice win, as it looks like Nvidia wants Amazon's Trainium chips and its graphics processing units (GPUs) to be able to work together. Meanwhile, the optical interconnect market is growing in importance as AI chip clusters keep growing larger.

Is the stock a buy?

Marvell shares have more than doubled in less than two months. This has taken its valuation from reasonable to looking pretty pricey, with a forward price-to-earnings (P/E) of over 43 times. The company is in better shape after these deals, but I don't think they justify its price doubling in such a short period, and questions still linger about its Amazon custom chip business in the longer term. As such, I wouldn't chase this AI stock.

Geoffrey Seiler has positions in Alphabet, Amazon, and Broadcom. The Motley Fool has positions in and recommends Alphabet, Amazon, Broadcom, Marvell Technology, Microsoft, and Nvidia. The Motley Fool has a disclosure policy.