Drill Down Earnings, Ep. 473: Marvell Technology Q2 earnings – ($MRVL) – A Deep Dive with Cory Johnson

Cory Johnson (0:04)

Welcome to Drill Down, we have quarterly results from Marvell.

Not to be confused with the people that brought us the amazing Spider-Man and the Fantastic Four, but Marvell, chip maker based in Silicon Valley, a really important company, one of the 50 most important companies in technology. I'm Cory Johnson, Chief Market Strategist of Epistrophy Capital Research here. Marvell's second quarter, 2027 fiscal 2027 numbers. We're better than Wall Street's expectations, but the expectations were quite high around the stock and the stock is selling off in after hours. So let's dig a little bit deeper and not look at the earnings beat, but maybe try to understand what's happening with this business here. Now, revenue growth is improving. Revenue growth was up 37% on a year over year basis.

And now we've seen two quarters of improving revenue growth. Revenues have been growing for quite a while, for the last two years or so. But again, the growth rate tailed off and now it is coming back. And operating margins are also improving here. They have been above 15% for each of the last four quarters. 17% operating margins in the quarter they just reported. So improving operating margins was, you know, making a profit. You sell stuff for more than it costs. That's what you want to do in business. You can write that down. Let me think about what they sell because they sell all kinds of chips. But they're focused in two areas principally. Data centers, which was 79% of revenues. And they call communications and other. But they're very involved in the optical transceiver business, which you all know probably that I'm obsessed with. That was 21% of revenues. So they're making a lot of the chips that go into optical transceivers that are plugged into server racks right now. And they're even making some of the components that are going to go into CPOs, co-packaged optics and NPOs, near-packaged optics. They talked about both of those things in the conference call. Now, their data center business re-accelerated. It grew 46% on a year-over-year basis. And that was stronger than it had been growing. And the commentary and everything we can see in these numbers were super positive about that. But the communications business cooled off a little bit. I was surprised to see this, because you don't see it in the results from any of the big communications companies. All those companies, the accelerating growth rates in their communications business, these guys only said 10%.

And they didn't really explain it to my satisfaction in the conference call. They called it lumpiness.

Okay. Anyway, custom silicon is very important here for this company. So custom silicon, these guys have what they call a significant acceleration in their custom business beginning the second half of fiscal 2027 That's probably Google. Remember, these guys did this big deal with Google in August. They announced that they were going to give Google warrants the right to buy 59 million shares of Marvell stock at $206.58. The stock is trading at, I call it, $230 right now.

And the vesting of those warrants, the ability to put those to work, was going to be essentially tied to every $500 million worth of chips that Google would buy from the company. And this is all to support their tensor processing units at Google, their TPUs. Maybe taking some business from Broadcom was a really interesting deal. And there were a lot of questions on the conference call about that. But this custom silicon business is going to be very big for them. And Data Center really is the big story here. Their data center portfolio, as I mentioned, growing at 46% on a year-over-year basis. Now 79% of revenue, which I also mentioned, from 74 a year ago.

And again, their AI infrastructure of networking, custom compute, interconnect, is really taking over their old legacy communications enterprise business here.

AI Booking is not just AI revenue, we're strong. And we like to see that orders for the future. We certainly saw that with, you know, this was the Google deal suggested as well. I do say Google because it was Google, art of alphabet. It was the Google Cloud business that made that deal. Their product world map is going to get its own investor showcase. And I think, I don't know, sometimes what happens to companies, when they've got an investor meeting coming up, they don't, you know, shoot the whole thing when they're announcing earnings right before that. So we'll see what more information we get on October 6th, when Investor Day is coming up for Marvell. But at that point, they're going to talk about their long-term strategy to go into the world of AI and expand the world of AI. The market did not like these numbers. The stock was off 7% after I was trading. But that's on the heels of a 223% move in a prior 12 months. That's pretty, pretty good. Now the CEO, Matt Murphy, was talking about how these businesses are going to work in terms of their shifting into the data center and AI and doing custom silicon, which is kind of amazing that anyone thinks they can compete with the likes of an AMD or an NVIDIA. Here's what Matt Murphy had to say.