Our Thesis Is Playing Out for This One-Rated Chip Stock

* We reiterate our $95 price target for Marvell following its July-quarter results.

* Data center revenue surged and is expected to accelerate further as custom AI chip programs ramp.

* Marvell called the bottom for its enterprise networking and carrier infrastructure segments.

* We see demand in those two segments benefiting from AI adoption.

* With 36.5 million shares short going into Marvell’s earnings report, short covering is helping pop the stock – here’s how we intend to handle that.

Last night Marvell Technology MRVL reported its July-quarter results. Earnings of $0.30 per share on $1.27 billion in revenue matched the market consensus. The shares are moving higher this morning, and we are reiterating our $95 price target. We expect others on Wall Street will be lifting their targets given the accelerating strength in data center and the improving outlook for Marvell’s enterprise networking and carrier infrastructure segments. As we see it, our thesis for the shares is playing out.

Covering the Pop

Helping push MRVL higher this morning is something we’ve encountered in recent weeks: short covering. Roughly 36.5 million shares were short as of August 15 per data from Nasdaq compared to the average trading volume of around 11.3 million shares. While our thesis for MRVL shares is unfolding as expected and we see further upside ahead, should this short covering push our position in MRVL shares past 4.5% of the portfolio’s assets and into overbought territory (something we saw with Axon AXON after earnings) some prudent profit-taking may be called for.

Data center, Marvell’s largest end market responsible for 69% of total revenue, grew 92% year over year, offsetting expected declines at Marvell’s other four segments. Coming off Nvidia’s NVDA earnings and recent Big Tech spending comments such data center strength shouldn’t be shocking. That spending and the ramp of its custom AI silicon programs with Meta META and Amazon AMZN and the one with Microsoft MSFT commencing in the coming quarters is expected to accelerate the pace of Marvell’s data center revenue growth from 7.9% sequentially in the July quarter to the high-teens. As Marvell’s custom AI programs ramp, we see further growth ahead for its data center segment and better margins as those programs find their sweet spot.

Calling Out the Bottom

At the same time, Marvell called out the July quarter as being the bottom for its enterprise networking and carrier end markets. Those segments once accounted for 45% of company revenue, but the industry inventory adjustment over the last few quarters shrank that to just 18% in the April and July quarters. On the earnings call, Marvell said it is seeing a rebound in order flow in both segments that should translate to mid-single-digit revenue growth in the coming quarters. We expect that to strengthen as AI adoption gobbles up existing network capacity.

Those combined outlooks along with rising demand in Marvell’s consumer (7% of revenue) and automotive (6% of revenue) segments, led the company to guide current quarter revenue up 14% sequentially at the midpoint of its guidance. Given the ramp in custom AI chip programs, we should not expect meaningful margin improvement in the near term. We’re seeing the same pattern with Nvidia as it goes from sampling to ramping up its Blackwell products.

Dell Results Add Support

Helping support Marvell’s outlook for its key end markets, Dell’s DELL earnings last night showed its servers and networking revenue surged by 80% to $7.67 billion, significantly exceeding the consensus of $5.96 billion. Moreover, Dell sees revenue for its Infrastructure Solutions Group, which houses its servers and networking business, growing 30% sequentially in the current quarter after delivering 38% in the July quarter.

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