Marvell Technology, Inc. MRVL shares have declined 8.3% so far in July 2024. This drop follows Bloomberg's Jul 16 report about the U.S. government planning to tighten restrictions on China's access to advanced AI chips.
On Jul 17, MRVL shares fell by 10.1% in response to the news, and the decline has since deepened, erasing 15.4% of its market capitalization. Before the Bloomberg report, Marvell stock was up 25.7% year to date. However, after the report, its year-to-date return has fallen to 6.3%, significantly lagging the Zacks Computer and Technology sector's 17.2% growth and the S&P 500's 13.3% increase.
The broader semiconductor industry also felt the impact, with shares of major companies like NVIDIA Corporation NVDA, Advanced Micro Devices, Inc. AMD and Micron Technology, Inc. MU dropping 7.1%, 6.3%, and 10.2%, respectively, on Jul 17.
Given the uncertainty and heightened risk associated with Marvell's significant exposure to the Chinese market, investors face a crucial decision: should they buy, hold or sell Marvell shares now?
YTD Price Performance
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Impact of Tighter Restrictions on MRVL
The proposed tighter restrictions on chip exports to China could severely impact Marvell's financial performance. China is a major market for semiconductor products, and Marvell generates a substantial portion of its revenues from Chinese customers. In the first quarter of fiscal 2025, more than 45% of Marvell's total revenues came from China. Restricting access to advanced AI chips could lead to reduced sales, hurting Marvell's revenues and earnings.
Additionally, Marvell may struggle to find alternative markets to offset potential losses from China, potentially slowing its growth trajectory. The restrictions could also disrupt Marvell's supply chain, increasing costs and delaying product development, further affecting its competitiveness and profitability.
Trading Below Key Moving Averages
Marvell shares are currently trading below their 50-day and 200-day moving averages, indicating short-term bearish sentiment.
Moving Average
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Promising Long-Term Prospects
Despite these challenges, Marvell's long-term prospects remain promising. The company is well-positioned to benefit from the booming artificial intelligence (AI) market. According to Gartner, revenues from AI semiconductors are expected to grow 33% to $71.25 billion in 2024 and another 29% in 2025 to reach $91.96 billion.
Although Marvell's chips don't directly process AI tasks, they play a crucial role in managing and transporting the massive data generated by AI applications. As data centers upgrade with advanced graphic processing units (GPUs) from NVIDIA and AMD to handle AI workloads, the demand for Marvell's data-handling solutions is expected to increase.
Marvell's high-performance electro-optics products, including PAM DSPs and ZR interconnects, are essential for seamless data transmission in AI-enhanced data centers. This positions Marvell as a key supplier as AI drives the need for more sophisticated data infrastructure.
The company's strategic investments in emerging technologies like PCIe Gen 6 retimers and next-generation data center interconnect (DCI) products align with the industry's push to scale data center capacities. These innovations ensure Marvell remains indispensable as AI data traffic grows.
Marvell's focus on custom AI silicon for cloud providers strengthens its market position. The ramp-up of custom AI compute programs is expected to drive mid-single-digit sequential growth in data center revenues in the second quarter of fiscal 2025.
Impressive Long-Term Projections
Wall Street analysts are optimistic about Marvell's long-term prospects. The Zacks Consensus Estimate for fiscal 2026 indicates a year-over-year increase of 31.5% in revenues and 73% in earnings. Additionally, the long-term earnings growth estimate for Marvell is pegged at 28%, significantly higher than the Zacks Technology Services industry's average growth estimate of 21.5%.
Reflecting the positive sentiment around Marvell, the Zacks Consensus Estimate for earnings per share has seen significant upward revisions.
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Conclusion
Despite Marvell's promising long-term outlook driven by the AI boom and strategic investments, increasing restrictions on chip exports to China may undermine its performance in the near term. Therefore, it might be prudent for investors to wait for a more favorable entry point before buying the stock, considering the current uncertainties and potential risks affecting its short-term prospects.
However, investors already owning the stock may expect the company's growth prospects to be rewarding over the long term. Currently, Marvell carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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