Why Marvell Technology Plunged Today
Key Points
Marvell agreed to acquire Lumentum in an all-stock deal.
Marvell is paying a premium that would amount to a price five times higher than Lumentum was trading only a year ago.
Investors fear Marvell is buying at the top, while Marvell sees opportunity combining the two companies' technologies for next-gen AI communications.
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Shares of communications semiconductor giant Marvell Technology (NASDAQ:MRVL) plunged 10% as of 12:54 p.m. EDT, after the company announced that it had agreed to purchase optical laser leader Lumentum (NASDAQ:LITE).
The deal is all-stock, and Marvell will be purchasing Lumentum at roughly a $115 billion valuation, or a 24% premium.
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While not an egregious premium, Lumentum's stock had already rocketed higher over the past two years, with Marvell's purchase price representing more than five times Lumentum's share price just one year ago. So, investors fear Marvell may be paying a steep price for the asset.
Why Marvell loves Lumentum
Marvell likely coveted Lumentum for the same reason Lumentum's stock has rallied over the past year: its proprietary optical laser technology is increasingly sought and required by next-gen artificial intelligence systems.
Artificial intelligence not only requires many more optical interconnects between data centers, but as speeds increase, server racks will also begin replacing traditional copper interconnects with near-packaged and co-packaged optics inside racks, and eventually even inside servers.
This is likely where Marvell sees risks and opportunities. While Marvell is already producing a co-packaged optics solution, it appears that Marvell management sees more opportunity in combining Marvell's technology suite of digital signal processors and XPU-attach connectivity with Lumentum's indium phosphide laser technology to yield highly differentiated products for next-gen AI systems.
Image source: Getty Images.
Investors aren't sold
The market is definitely not in the mood for an announcement like this, as investors have recently been dumping AI-related stocks amid a host of potential fears ahead of the mid-term elections. However, AI-related stocks are volatile and have seen severe sell-offs from time to time, yet as long as the long-term AI story remains intact, these stocks have recovered.
As of now, while there is a lot of fear and concern, the recent reports from major tech companies still show booming AI-related revenues, with guidance for strong growth in 2027 and 2028. As such, both Marvell and Lumentum may be worth a look during this severe sell-off.
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Billy Duberstein and/or his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Lumentum and Marvell Technology. The Motley Fool has a disclosure policy.
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