Is Marvell Stock a Buy After It Joins the S&P 500?

Inclusion in the S&P 500 (SNPINDEX: ^GSPC) is a big deal for a stock. It helps validate a company's success, and the stock typically gets an immediate boost, as funds that track the index are forced to purchase shares.

Marvell Technology (NASDAQ: MRVL) will become one of the newest members of the index later this month, along with electronic manufacturing services provider Flex. These companies will be replacing soup maker Campbell's and swimming pool supplier Pool Corp.

With Marvell about to enter the S&P, let's see if now is a good time to buy the semiconductor stock.

Image source: The Motley Fool.

A big optical opportunity

Marvell shares have been on a tear this year, tripling even after a pullback. The name got a lot of attention earlier this month when Nvidia CEO Jensen Huang called it the next trillion-dollar company, sending its shares up more than 32% in a single day.

The excitement about Marvell largely stems from its connectivity business, where it is a leader in optical interconnects. Data centers have long been connected with copper wires, but as artificial intelligence (AI) chip clusters grow and servers become more complex, copper wires can't keep up with the required speed. Copper wire also becomes too bulky and generates too much heat.

The solution is optical interconnects, which let high-bandwidth data transfer over longer distances with lower latency and less power consumption.

Marvell is a leader in optical DSPs (Digital Signal Processors), chips that convert electrical signals from a graphics processing unit (GPU) into optical pulses. The company has become a close partner with Nvidia, providing optical and custom connectivity capabilities for its NVLink Fusion ecosystem.

As Nvidia and others continue to progress their chip architecture, they also need more optical bandwidth. At the same time, as hyperscalers build out massive, disaggregated clusters to handle different AI tasks, connectivity becomes even more important. Last quarter, Marvell upped its interconnect revenue projections, now expecting it to climb 70% this year.

In addition to its optical business, Marvell is also a major player in the ASIC (application-specific integrated circuit) market behind leader Broadcom. Marvell supplies some of the IP for Amazon's Trainium chips and is also in Microsoft's new Maia AI accelerators. This business is growing quickly, although there is some concern that Marvell has lost its lead role with Trainium chips to Taiwanese company AIchip.

While Marvell has a nice optical opportunity in front of it, the stock looks pricey, trading at a 64 times forward P/E. As such, I'd wait for the stock to pull back a bit further before looking to jump in.

Geoffrey Seiler has positions in Amazon and Broadcom. The Motley Fool has positions in and recommends Amazon, Broadcom, Marvell Technology, Microsoft, and Nvidia. The Motley Fool recommends Campbell's, Flex, and Pool. The Motley Fool has a disclosure policy.