MRVL "Compelling" Risk-Reward: Morningstar's Bull Thesis in Earnings, AI Buildout

Sam (0:00)

We're back on Morning Trade Live and looking at Marvell's one-year chart. We are losing some steam today, but we were up quite significantly yesterday off the back of some up guidance at its Invest today. It was one of the top performers on the S&P 500, but we came off the highs of the summer. We're climbing back once again right now, as you can see. Let's go inside out on this company and get some takeaways from its Invest today. Joining us now is William Kerwin, Senior Equity Technology Analyst over at Morningstar. Good morning, William. Thank you so much for your time. What were your biggest takeaways from some of this bullish commentary we got yesterday?

William Kerwin (0:37)

Well, good morning, Sam. And it was certainly very bullish. So we raised our valuation up to $360 a share, up from 300 previously. And we still think there's a compelling risk reward trade-off here for investors at these levels, especially being down a bit this morning, as you said. But really the news was this guidance. Now, we had been expecting pretty immense growth over the next three and over the next five years for Marvell, but simply put, the guidance that management unveiled yesterday blew our model coming in out of the water. And we think it's important to note that we see management's targets as very credible. This is the latest in several years of management putting out what looked like extremely bullish targets at first and then achieving against those. And that's generated that really impressive one-year stock chart that you showed just now.

Sam (1:26)

For sure. So you believe what they put out there now is well within reach?

William Kerwin (1:32)

We think it is, but the key risk in talking about any of these AI infrastructure stocks is what is the broader AI spending environment look like? Now we feel there are very good data points and momentum towards this accelerating demand through 2028

And the question then becomes what happens thereafter and do we get this durable spending growth through 2030 and potentially beyond? Management was very bullish that the economics that these cloud hyperscalers are getting a positive ROI on AI and that spending can continue. And we tend to agree, but certainly we would say that's the primary risk to achieving these numbers.

Sam (2:09)

And something I've noticed with this one, as far as investors rewarding this stock has been the visibility that they're able to give. I mean, is that the story with this one that they're able to look into the future so far in what has typically been a more sort of cyclical business that they are sort of flying in the face of that, you know, sort of, I guess, traditional theory for a company like that?

William Kerwin (2:37)

Well, we think it's a paradigm shift in this age of AI, where you have customers up and down the supply chain that in response to supply constraints, in response to incredible demand, we are seeing these multi-year far out spending commitments trying to lock down deals, lock down supply. And so we don't really think this is necessarily an idiosyncratic dynamic for Marvell, but more so indicative of just how much demand and just how tight supply there is in the AI infrastructure supply chain.

Sam (3:10)

Right. Why does it matter for Marvell? I mean, what does it do for the broader AI industry? Because it was interesting on a day like that today where we saw obviously the stock being rewarded. Semiconductors as a whole lagged the entire tech space.

William Kerwin (3:28)

So they have a lot of shots on goal, as they will call them. And really this spreads across what we would call compute and connectivity. Now, optics has been a pretty hot trend in the market this year. Marvell is an optics leader. It makes essentially processing chips that convert optical signals into electrical signals. This has a huge place in AI networks effectively, how GPUs connect to each other in an AI data center. But Marvell also has this business of creating these custom processors for AI, which we call XPUs. It's a competitor to Broadcom, to the likes of MediaTek here, and really a whole lot of other auxiliary networking slash connectivity, what we would call it. And so there are a huge amount of buckets that the firm is playing into within AI infrastructure. It's broadly exposed in the data center, and really what we see is that it's firing on all cylinders, and all of these buckets are growing. But I would put the two largest ones is really that compute and then that optics connectivity.

Sam (4:28)

Okay. Yeah. I mean, obviously more diversified as well. But I mean, a year-to-date climb of over 200 percent is, I hear what you're saying about the spending, but is the bar just getting higher and higher for these stocks? Does it get more difficult?