uncertainties about AI chip demand

Marvell Technology experienced a tough day in the markets, with a 15% drop in pre-market trading on Friday. The main reason for this sharp decline is related to the bleak outlook for demand for data center chips, a key sector for the company’s growth.

Investor expectations were particularly high, fueled by the boom in semiconductor manufacturers’ valuations, driven by enthusiasm for artificial intelligence. However, Marvell failed to meet these expectations, raising doubts about the strength of demand from major cloud service providers.

The Context: High Expectations and Signs of Slowing Down

In recent months, the chipmaker sector has been at the center of Wall Street’s attention, thanks to the so-called “picks-and-shovels AI trade,” or the rush for fundamental tools to fuel the artificial intelligence revolution.

Companies like Nvidia have seen their valuations skyrocket, becoming true market indicators. However, Nvidia’s most recent quarterly results have raised questions about the actual strength of demand from cloud service providers, casting a shadow on Marvell’s prospects as well.

Statements from CEO Matt Murphy

During the conference call following the release of the results, Marvell’s CEO, Matt Murphy, stated that revenues from data centers in the third quarter will be “sequentially stable,” meaning no growth compared to the previous quarter.

This forecast immediately concerned analysts and investors, who were instead expecting steady expansion in a segment considered crucial for the company’s future, especially in light of the growing demand for data center hardware AI.

The role of custom chips and competition in the cloud

In recent times, Marvell’s growth has been primarily driven by the custom chip business, aimed at major cloud service providers like Amazon and Microsoft.

These companies are investing in the development of in-house solutions to reduce reliance on external suppliers like Nvidia.

However, the demand for these chips is not linear: Murphy pointed out that a certain “irregularity” is normal when it comes to building large-scale infrastructure, referring to the development cycles and alternating investment phases typical of major cloud clients.

Microsoft’s Delays and Multi-Vendor Strategies

A recent industry report revealed that Microsoft would have postponed the launch of its internal AI chips at least until 2028, or even beyond. This news helps explain the volatility in demand for Marvell’s custom chips.

Additionally, according to analyst Kinngai Chan of Summit Insights, who maintains a “hold” rating on the stock, Marvell suffers from a smaller scale compared to larger competitors and will have to deal with the trend of hyperscale customers to diversify suppliers, adopting a multi-vendor strategy that could further compress profit margins.

Broadcom’s Competition and Market Outlook

In the cloud chip sector, Marvell finds itself competing with giants like Broadcom, which has yet to release its results for the July quarter.

The competition is fierce, especially regarding the supply of custom chips and networking solutions to major cloud operators. If the losses recorded in the pre-market are confirmed, Marvell risks seeing almost 10 billion dollars in market capitalization vanish in a single session.

Comparative Evaluations: Marvell versus Broadcom

According to data collected by LSEG, Marvell has a twelve-month price/earnings ratio of 23.95, significantly lower than Broadcom’s 39.03. This figure reflects both the more modest growth expectations for Marvell and the competitive pressure exerted by larger rivals.

A Look to the Future: Signs of Recovery in the Fourth Quarter

Despite the current difficulties, CEO Matt Murphy expressed confidence about the future of the custom chip business. According to his forecasts, this division should show signs of recovery in the fourth quarter, thanks to a new increase in orders from cloud customers.

If this trend materializes, Marvell could return to growth in the second half of the year, regaining some of the ground lost in the markets.

Conclusions: Challenges and Opportunities for Marvell Technology

The dark day for Marvell Technology reflects the major challenges facing chip manufacturers in a rapidly evolving sector such as artificial intelligence and cloud computing.

Irregular demand, fierce competition, and supplier diversification strategies by major clients are all factors contributing to an extremely competitive environment.

However, the ability to adapt to the investment cycles of cloud giants and innovate in the field of custom chips could be the key to Marvell’s revival in the coming months. Meanwhile, investors remain on the lookout for concrete signs of recovery, aware that the future of semiconductors will increasingly be played out on the field of artificial intelligence.