Marvell Earnings: We’re Confident About AI Goals, Coming Rebound for Storage; Raising FVE 13% to $61

We raise our fair value estimate for Marvell Technology MRVL to $61 per share, from $54, after reporting decent fiscal first-quarter results and providing bullish long-term commentary. Marvell quantified targets for artificial intelligence-derived revenue for the first time, which include a quadrupling of sales over the next two years. While we already saw large-scale cloud demand as nearly insatiable, we believe AI takes it to another level and makes Marvell’s new targets achievable. In the short term, it appears that inventory digestion at storage customers that has hampered sales of late has troughed, and we expect Marvell to return to sequential growth next quarter. In our view, Marvell is well-positioned to serve data infrastructure needs over the long term with its differentiated chips—a belief that underpins our narrow economic moat rating and makes the firm ripe to benefit from a secular trend like AI. Shares rose 18% after hours on the AI bullishness. Shares are up 62% year to date based on after-hours levels, and we now see them as fairly valued.

Fiscal first-quarter results came in mostly in line with our expectations. Sales declined 9% year over year and 7% sequentially to $1.32 billion as Marvell’s sales of storage controllers into data center and consumer applications flagged from customers working through excess inventories. Non-GAAP gross margin dropped 350 basis points to 60% from weak volume and a lower data center mix, bringing non-GAAP operating margin down 780 basis points to 25.3%.

Fiscal second-quarter guidance was slightly above our expectations and implies the weakness Marvell has been experiencing for a couple of quarters has bottomed. Midpoints of sales ($1.33 billion), non-GAAP gross margin (60.5%), and non-GAAP EPS ($0.32) imply sequential growth and margin expansion. We expect growth to accelerate in the fiscal second half as inventory digestion continues to subside and Marvell’s secular growth shines through more clearly.