Ericsson Comments Back Our Thinking on This Chip Holding

When digital infrastructure company Ericsson ERIC reported its September quarter results this morning, what we found corroborated our thinking for the portfolio’s position in One-rated Marvell Technology MRVL. Ericsson CEO Borje Ekholm talked about what is driving demand for 5G is the consumer mobile internet, adding that as data growth continues at a high pace, new investments will be needed. That ties to our thinking that as consumer AI adoption accelerates, digital networks will see their capacity chewed up, necessitating enterprise and carrier infrastructure spending for additional capacity.

Ekholm gave another reason to support that thinking — opportunities to drive enterprise digitalization that are outside of the consumer mobile broadband market. We’re seeing some of them now with AI adoption but also gains from portfolio companies such as ServiceNow NOW and Elastic N.V. ESTC.

That’s a positive combination for the 18% of Marvell’s business tied to those end markets over the last six months. Remember those end markets have been depressed of late, but at one time they accounted for more than 40% of Marvell’s revenue. The rebound in that revenue stream paired with strong data center and AI demand bodes very well for Marvell’s business and our position in the coming quarters.

Amazon’s AI Chip Deal With Databricks

Adding to our thinking on that, we are reading reports Amazon AMZN inked a five-year deal with Snowflake SNOW competitor Databricks to allow the data warehouse company to use Amazon's Trainium AI chip. This has us thinking about the relationship between Amazon and Marvell, which expanded to include AI chips earlier this year.

Alongside that event, Marvell disclosed other AI wins with other cloud computing companies that are widely believed to be Microsoft MSFT and Meta META. Revenue from these programs is expected to start this year and ramp over the coming quarters. Given the initial ramp, we would not be surprised to see these programs carry lower margins, but if history holds, they should climb over time.

Marvell Has Been a Strong Horse for the Portfolio: Our Latest Thoughts

As we go through the current earnings season, we’ll be listening for comments about cloud spending from the likes of Amazon, Meta, Microsoft, and Alphabet GOOGL. Recent comments from Nvidia NVDA and Hon Hai and monthly results from Taiwan Semiconductor TSM point to a strong demand. That has lifted not only shares of Nvidia but also Marvell’s.

The 44% return in MRVL shares since the early August bottom in the market isn’t lost on us, nor is how it has resulted in the position becoming the portfolio’s second-largest holding at 4.3% of its assets.

While not yet overbought, should today’s developments push MRVL shares meaningfully higher, some prudent portfolio management may be called for. If the stock moves past the low $80s, we’ll need to reconsider our One rating.

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At the time of publication, TheStreet Pro Portfolio was long MRVL, NVDA, AMZN, MSFT, META, GOOGL, NOW and ESTC.