Semiconductor stocks have been in excellent shape on the market, which is apparent from the remarkable 56% gains registered by the PHLX Semiconductor Sector index over the past year. Graphics specialist Nvidia (NASDAQ: NVDA) has played a leading role in this surge as its shares have skyrocketed a staggering 233% during this period, driven by the company’s solid position in the market for artificial intelligence (AI) chips.
Nvidia’s graphics processing units (GPUs) have experienced massive demand thanks to their capability to train large language models (LLMs), which are the foundation of popular applications such as ChatGPT. The cost of each AI-focused GPU that Nvidia sells can range from $10,000 to $30,000. It is important to note that the company reportedly generates a profit of nearly 1,000% on these chips, according to investment banking firm Raymond James.
The market for AI chips is forecasted to grow rapidly in the future and Nvidia is poised to capitalize on its growth, but Citi analyst Atif Malik believes that Marvell Technology (NASDAQ: MRVL) could be a better semiconductor pick than Nvidia. Let’s explore why.
Marvell Technology is evolving as another strong AI semiconductor play
The Citi analyst maintained his buy rating on Marvell stock and highlighted that the company is well positioned to take full advantage of the increasing demand for custom AI chips and its optical modules that facilitate high-speed communication between data centers. Malik, however, is not the only one optimistic about Marvell’s prospects.
Rick Schafer of Oppenheimer is forecasting an uptick in Marvell’s sales this year due to its AI exposure, noting that the company’s data center storage and switching solutions will experience greater demand. Schafer believes that Marvell stands to benefit from multiple new product cycles and potential content gains, which is why the analyst has an outperform rating on the stock.
A detailed look at the semiconductor solutions that Marvell provides will indicate why Wall Street is positive about the company’s AI-related prospects. Marvell is recognized for producing custom application-specific integrated circuits (ASICs), which the company says are tailored “for the unique demands of each AI, cloud data center and OEM customer.”
Major cloud service providers such as Microsoft, Alphabet, and Meta Platforms have been focusing on the development of custom ASICs for addressing AI workloads. The reason why these major AI players are developing custom AI chips is that they can help them derive more performance and power efficiency. This is not surprising as ASICs are programmed to run specific workloads and perform dedicated operations, and they can help accelerate AI training and inference models as a result.
Morgan Stanley estimates that ASICs could represent 30% of the total AI chip market by 2027, which the investment bank believes could be valued at $182 billion at that time. Therefore, the market for AI-focused ASICs could be worth nearly $55 billion annually by 2027 based on Morgan Stanley’s estimates. This could create a significant growth opportunity for Marvell considering that it has generated $5.5 billion in revenue over the past year.
How much potential upside can investors anticipate?
Marvell Technology reportedly commands 12% of the ASIC market, according to JPMorgan. Assuming Marvell can maintain this share in 2027 and the market for AI-focused ASICs indeed reaches $55 billion, the company is poised to generate an additional $6.6 billion in AI-related sales. This would be a significant jump over Marvell’s current quarterly revenue run rate of $200 million from AI-driven chip sales, as well as the potential $1 billion revenue that the company could generate from this market in fiscal 2025 (which will begin at the end of this month).
Analysts are forecasting that Marvell’s top-line growth will accelerate following a 7% decline in fiscal 2024 to $5.5 billion, rising to $6.1 billion in fiscal 2025 and $7.3 billion in 2026. This pace of growth could be even higher considering the additional AI-related revenue that Marvell could secure, as was just mentioned.
Assuming Marvell does achieve incremental revenue of $6.6 billion by 2027 (which will coincide with the majority of its fiscal year 2028), its top line could climb to $12 billion after four years — more than double the fiscal 2024 estimate of $5.5 billion. Multiplying the projected revenue with Marvell’s five-year average price-to-sales ratio of 8.6 points toward a market cap of $103 billion, which would translate into 71% gains from current levels.
With Marvell currently trading at 11 times sales, it isn’t too expensive based on historical levels, especially considering the new growth driver it could benefit from. Therefore, investors interested in acquiring an AI stock that isn’t as costly as Nvidia — which trades at 33 times sales — can think about purchasing Marvell Technology as it could certainly reap huge rewards from the growing sales of custom AI chips in the long run.
Should you invest $1,000 in Marvell Technology right now?
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JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Citigroup is an advertising partner of The Ascent, a Motley Fool company. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, JPMorgan Chase, Meta Platforms, Microsoft, and Nvidia. The Motley Fool recommends Marvell Technology. The Motley Fool has a disclosure policy.
An Analyst on Wall Street Suggests This Semiconductor Stock Is Superior to Nvidia, and It Could Increase Significantly, originally published by The Motley Fool