We're Upgrading This Holding to a One Rating After AI Revenue Surprise

On Wednesday night, Marvell MRVL reported January quarter results that outperformed consensus expectations and delivered April quarter guidance that bookended market forecasts.

Revenue strength in the January quarter was fueled by robust year-over-year growth in Marvell’s data center business, up 78% year over year (24% sequentially) to $1.36 billion (75% of sales). Given that strength, one might expect data center to be an even bigger part of the overall quarterly revenue pie. The reason it wasn’t was the unfolding rebound for Marvell’s enterprise networking and carrier infrastructure businesses, which rose 14% and 25%, sequentially.

During the corresponding earnings call, management called out how its AI revenue for the now-finished fiscal 2025 was substantially above the $1.5 billion target laid out at the company’s April 2024 AI Day.

Management shared that the mix of AI is now over 50% of data center revenue, which means when annualizing that January quarter figure and factoring in the continued ramp of custom AI solutions with Amazon AMZN, Meta META and Alphabet GOOGL, it’s easy to see why Marvell expects “to very significantly exceed our $2.5 billion target in fiscal 2026.”

Add in the continued rebound in carrier infrastructure and enterprise networking as AI adoption drives network congestion, and we continue to see a very nice tailwind behind Marvell’s business for this year into next year, especially as its custom AI solution with Microsoft MSFT starts to ship in calendar 2026.

Why Are Marvell Shares Under Pressure ?

When Nvidia NVDA reported its recent quarterly results, it delivered a beat-and-raise quarter, but its shares traded off because revenue guidance for the current quarter did not live up to exuberant whisper expectations and margins felt the impact of ramping its new Blackwell solutions. We are seeing something very similar with Marvell and its shares.

Marvell guided revenue for the current quarter to $1.78 billion to $1.97 billion, up 62% year over year at the midpoint of $1.875 billion. That’s a hair above the $1.87 billion market forecast, but like Nvidia, it falls short of the more aggressive $2 billion whisper numbers that made their way around Wall Street.

If you’re thinking about all those recent capacity-constrained comments from Microsoft, Amazon, Meta, Alphabet and others about the cloud/data center capacity and hearing rumblings of Alan Greenspan’s “irrationally exuberant” in your mind, we are right there with you. As those constraints lift we should see a re-acceleration in Marvell’s data center business when we compare calendar 2H 2025 with 1H 2025.

Also, like Nvidia, Marvell’s margins are being affected by the ramp in its proprietary AI silicon solutions. As we discussed with Nvidia, to those of us who have experienced new product ramps, this isn’t something new or out of the ordinary. Here too, we expect to see margin leverage return as these custom AI programs mature.

But as we’ve discussed investor sentiment is flashing Extreme Fear and market volatility is running high. That and questions tied to Trump tariffs that are nibbling away at S&P 500 EPS growth expectations for this year are leading to more conservative expectations. That explains why we are seeing some price targets for MRVL shares move lower on Thursday morning.

Barclay’s trimmed its target from $150 to $130, which is where ours was heading into Wednesday night’s earnings report. Wells Fargo lowered its target to $120 from $140, and both KeyBanc and Stifel have landed at $115. Even at those levels, based on where MRVL shares will start trading on Thursday, it implies more than 50% upside and as much as 75% with Barclay’s new target. Should we be surprised then that Loop Capital upgraded MRVL shares to a Buy from Hold with a $110 price target?

What Are We Going to Do?

We too will join in and take a more cautious stance with our MRVL price target, lowering it to $115 from $130.

As discussed above that offers significant upside, and more than enough for us to join Loop and boost our MRVL rating to One from Two. We acknowledge we may be early with this move and the price cuts mentioned above are likely to bring some added pressure on MRVL shares.

But we are patient investors and ones that look to capture the full benefit of Marvell’s ramping custom AI business, and the ensuing rebound in its next two largest revenue drivers. As the shares settle out, there is a high probability the Portfolio will take advantage of the steep sell-off, which when viewed a few quarters from now is likely to be viewed for the overreaction that it is.

We will continue to heed upcoming data points, with the next known one being Taiwan Semi’s TSM February revenue report. We’ll be looking for that to support Hon Hai’s robust February revenue report which called out AI server shipments and led the company to reconfirm market expectations for its Q1 2025 quarter.

We’ll also continue to listen to what companies are saying as the March investor conference season continues. So far, we’ve heard Microsoft at the Morgan Stanley TMT conference this week share it expects a better balance between AI/cloud demand and supply exiting the June quarter.

At the same conference, Alphabet reiterated its plan to spend $75 billion this year on data centers, servers, networks and equipment with “servers being the largest component of that.” Meta also reiterated plans to spend around $65 billion this year with “a lot of that” on AI infrastructure.

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At the time of publication, TheStreet Pro Portfolio was long MRVL, AMZN, META, GOOGL, MSFT and NVDA.