Another Semiconductor Stock Is Headed to the S&P 500

**Jon Quast** (0:02)
There's another semiconductor stock headed for the S&P 500 You're listening to Motley Fool Hidden Gems Investing.
Welcome to Motley Fool Hidden Gems Investing. I'm Jon Quast, and I'm joined today by contributors Matt Frankel and Rachel Warren. We're going to dip into our mailbag today, not once, but twice. But first, we wanted to start with our lead story, and that is about once a quarter, the S&P 500 removes some companies from the index and adds other companies. This is an index that tracks roughly 500 of the largest, most profitable US-based companies. There are some times where a company gets acquired or something like that, and then another company is added in between the regular rebalancings. But we had this regular one, and Poolstock and Campbell Soup Company are out. As a shareholder of Pool and a lover of Goldfish Crackers, I'm disappointed with that. But we have a couple new ones heading in, and that is Marvell and also Flex. And so, while the indexing itself isn't really something material that we Foolish investors really base an investment thesis on, sometimes it is fun to bring a new stock to our attention as they get added to the large index here. And so, we thought it would be fun in this episode to talk about these. And I'm going to start here with Rachel. We want to talk about Marvell going into the index. And basically, my question here for Rachel is, what is Marvell? What does it do?
And what is so interesting about the timing here is NVIDIA CEO Jensen Wong says, he believes that this can be a $1 trillion company someday. So, I want you to speak to that as well, Rachel.

**Rachel Warren** (1:45)
Yeah, I do think that this could very much qualify under the moniker of a hidden gem. So, Marvell technology, for anyone who's not familiar, this is a data infrastructure powerhouse. They specialize in the high-speed optical interconnect chips and custom AI silicon that's really essential in today's day and age for transmitting data across massive server clusters. And as you noted, Jon Jensen Wong recently declared Marvell the next trillion dollar company. And he said this because as AI models scale, computing has to be distributed across an entire data center. So this makes Marvell's high bandwidth connectivity a key solution to the industry's biggest physical bottleneck, which is data movement. Now you might be thinking a one trillion dollar milestone sounds outrageous for a company that's currently valued in the $200 billion market cap range. But I think that Wong's prediction is actually a reasonable long-term thesis. It's also backed by Nvidia's own $2 billion equity stake in Marvell. That's something that's very important to note as well. But Marvell's path to $1 trillion, there's a few key drivers here. There's the massive dual-engine revenue expansion. Hyperscalers are using Marvell to design custom AI chips.
That's a business that's projected across $10 billion in revenue by the company's fiscal 2029 The optical business is growing at a 70% plus growth rate. And that's as they're linking distributed GPU clusters at the speed of light. So if Marvell stains this very robust growth trajectory in the mid double digits, if they're able to hit that estimated $50 billion in revenue, $25 billion in EBITDA by 2031, you could be looking at a premium of about 40 AI infrastructure multiple. But I think that you could see where there is a mathematical justification for that trillion-dollar valuation. Obviously, this addition to the S&P 500 triggers mandatory index fund buying. And I think it also cements its role in global AI architecture. So it will be interesting to see whether the company hits this $1 trillion milestone. Whether it does or not, I think we are very much looking at a company that is playing an indispensable role in the AI infrastructure build out. And I think that's a very exciting thing to watch.

**Jon Quast** (3:56)
Yeah. As we're using the term hidden gems, not necessarily a small company, but one that might not be consumer facing very often. So it's hidden in that sense. Most people are unaware of the company and what it does. And so Marvell would qualify under that. But we're also looking for these companies that can deliver for shareholders. And you're pointing out basically that you think it is realistic that this company could be a trillion dollar market cap company someday. That would be based on these projections, right? I mean, the 2031 timeline, that would be if it could reach a trillion by then, by the time it's making 25 billion in EBITDA. I mean, this would be a four bagger in five years.
Let's have a little fun here. Matt, would you agree or disagree that it has a realistic path to this in the next five years?