Data center business guidance exceeds expectations, "ASIC chip giant" Marvell surges after earnings report

On December 2nd, during after-hours trading, the stock price of semiconductor company Marvell Tech soared, as its much better-than-expected guidance for data center business growth in the next fiscal year overshadowed the overall lackluster performance outlook, restoring investor confidence in this specialized custom chip manufacturer.

The company's stock initially fell by 5% after the earnings report was released, but reversed course after executives provided strong forecasts for the data center business during the earnings call, with the stock rising as much as 14% in after-hours trading.

The key driver behind the stock price increase was CEO Matt Murphy's revelation during the call that the company expects "year-over-year growth in data center revenue to exceed 25% in the next fiscal year." This guidance surpassed Wall Street's general expectations and sent a positive signal to the market regarding its core business growth momentum in the artificial intelligence hardware sector.

The initial weakness in the stock price may have stemmed from the company's conservative forecast for overall performance in the fourth quarter, which failed to deliver a surprise. This dramatic reversal highlights that, in the current market environment, investors are more focused on the long-term growth prospects of AI-related businesses rather than minor fluctuations in short-term performance.

Performance Meets Expectations, Key Guidance Shifts Market Sentiment

According to the earnings report, Marvell Tech reported a third-quarter adjusted earnings per share of $0.76 and revenue of $2.08 billion. According to FactSet survey data, analysts had previously expected earnings per share of $0.74 and revenue of $2.07 billion, with actual performance slightly exceeding expectations.

Among them, the data center business, which is the company's revenue pillar, performed robustly, with revenue in the quarter growing 38% year-over-year to $1.52 billion, slightly above Wall Street's expectation of $1.51 billion. CEO Matt Murphy stated in the earnings report that the revenue performance in the third quarter was "driven by strong demand for data center products."

Despite the solid performance in the third quarter, Marvell Tech's overall outlook for the fourth quarter appeared cautious. The company expects adjusted earnings per share of $0.79 (with a fluctuation of $0.05) and revenue of $2 billion (with a fluctuation of 5%). This is in line with analysts' predictions of $0.79 per share and $2.18 billion in revenue, failing to provide enough surprise to the market.

However, it was the additional information provided by Murphy during the subsequent conference call regarding the next fiscal year that completely changed market sentiment. His prediction of over 25% growth in the data center business injected a strong dose of confidence into investors.

Murphy also added that this optimistic forecast does not include the company's recently announced acquisition plan. On the same day, the company announced it would acquire AI startup Celestial AI for approximately $3.25 billion in cash and stock.

Market Divergence and ASIC Prospects

Driven by the AI boom, Marvell Tech's stock price soared 83% in 2024, but has fallen 16% year-to-date, reflecting market doubts about its ability to secure long-term orders amid fierce competition The core of investor disagreement lies in the prospects of custom ASIC chips (Application-Specific Integrated Circuits). ASICs are chips customized for specific purposes, such as Google's TPU, which is seen as a potential alternative to NVIDIA's GPUs. According to UBS analyst Timothy Arcuri in a report on November 23rd, "Investors continue to view custom ASICs from a 'win or lose' digital perspective—either you get the orders, or you're out."

However, Arcuri believes that the reality is that most customers are moving towards a diversified layout, "not only using multiple GPU suppliers but also multiple ASIC suppliers," which will benefit companies like Marvell Tech. He currently rates Marvell Tech as "Buy," with a target price of $110. Marvell's strong guidance on Tuesday seems to provide new arguments for this optimistic view