Is Broadcom Stock a Buy After Marvell's $115 Billion Deal?

On Nov. 2, Marvell Technology (NASDAQ:MRVL) agreed to buy Lumentum Holdings (NASDAQ:LITE), a maker of lasers and optical transceivers, in an all-stock deal. The firms put Lumentum's enterprise value (its stock market value plus debt, minus cash) at $115 billion, using both stocks' Oct. 28 closing prices.

Marvell says the combination creates a category leader in artificial intelligence (AI) connectivity -- the chips and optical parts that send data between AI processors.

Broadcom (NASDAQ:AVGO) knows the business well. The chip designer sells custom AI accelerators, Ethernet switches, and optical components for AI data centers. But its stock dipped only about 1% on Nov. 2, while Marvell shares slid about 13%.

At roughly $335 as I write, Broadcom stock trades about 30% under its June 2 record close of $481.57. When I last wrote about the company on Oct. 28, with shares near $342, I said I'd consider buying a little at a time.

Does a bigger rival change that?

Image source: The Motley Fool.

Marvell is building a bigger rival

Marvell already designs custom AI chips, plus network switches and the electrical and optical interconnect chips that link AI systems together. Lumentum brings high-performance lasers and optical transceivers, along with its own compound semiconductor manufacturing.

Broadcom competes in most of those markets. It designs custom AI accelerators for six customers, including Alphabet's Google and Anthropic. The chips are made for one customer's AI work, as an alternative to general-purpose graphics processing units (GPUs).

Broadcom also sells Tomahawk Ethernet switches. On its fiscal third-quarter earnings call on Sept. 2, CEO Hock Tan said the company had just finished designing Tomahawk 7, which he called the industry's first 200-terabit-per-second Ethernet switch.

And Broadcom makes lasers, too.

"[D]emand for lasers ... is far surpassing supply out there in the industry," Tan said on the call. He added that Broadcom holds "a fairly substantial share of this market."

Put simply, Lumentum's lasers sell into a market where buyers can't currently get enough of them. Sure, shortages like this don't tend to last. But I think it makes the deal more of a long-term threat to Broadcom than a short-term one. A bigger rival could matter more when supply catches up to demand and buyers start shopping harder on price.

Broadcom's AI sales are still accelerating

Showing how far ahead Broadcom's AI business is, its AI semiconductor revenue hit $16.7 billion in fiscal Q3 (the quarter ended Aug. 2), up 221% year over year. Marvell's total revenue for its own quarter ended Aug. 1 was $2.74 billion, or around one-sixth as much.

And Broadcom's AI growth has picked up every quarter this year. AI revenue growth climbed from 106% in fiscal Q1 to 143% in fiscal Q2, then to 221% in fiscal Q3. Management guided for 236% year-over-year growth, to $21.7 billion, in fiscal Q4, which ended Nov. 1.

Broadcom has its own $115 billion number, and it means something else: the company's forecast for AI semiconductor revenue in fiscal 2027, the fiscal year that started this week.

This would double the almost $58 billion Broadcom expected for fiscal 2026. And Tan said on the Sept. 2 call that the company's already locked in the supply to get there.

"Our demand actually exceeds this outlook, and we will work to improve supply," he said.

The deal won't affect that year directly. Marvell expects the acquisition to close in the first half of calendar 2028, pending shareholder and regulatory approvals. So Broadcom's fiscal 2027 will probably be over before the combined company even exists.

Time to buy?

Investors can buy this growth for less than they'd pay for the S&P 500 (SNPINDEX:^GSPC). Broadcom trades at around 17 times analysts' consensus earnings estimate for fiscal 2027.

This compares to about 18.7 times forward earnings for the S&P 500 overall.

True, Broadcom relies on a few very big AI customers, and a stronger Marvell could offer these customers another place to shop for custom chips and lasers. But this option is probably years away. And Broadcom's AI business is already several times the size of Marvell's whole company.

Ultimately, the deal doesn't change my take on Broadcom. It does make the company's laser and switching sales worth watching more closely once the combined company exists.

Meanwhile, the stock is a bit cheaper than when I last wrote about it, and nothing in the deal affects Broadcom's fiscal 2027 outlook. I'd still consider buying shares at this price.

Daniel Sparks and his clients do not have positions in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Broadcom, Lumentum, and Marvell Technology. The Motley Fool has a disclosure policy.