Marvell’s AI Business Is Accelerating. The Stock Sell-Off Is a Gift.

The AI infrastructure sector has entered a new phase, with investors demanding growth that vastly exceeds existing expectations. This creates an unusual situation for semiconductor stocks – a company can report record revenue and raise its outlook, yet its shares may still decline. This was the case with Marvell Technology (MRVL) on Thursday, following the release of fiscal Q2 earnings.

Despite revenue growing by 37% year-over-year to a record $2.739 billion and non-GAAP earnings per share increasing by 40% to $0.94, shares fell more than 6% in morning trading.

The company raised its fiscal 2027 revenue outlook to approximately $12 billion, up from $11.5 billion, and its fiscal 2028 target to $18 billion, up from $16.5 billion. However, expectations had become so high that even a modest beat was insufficient. Marvell's shares had surged 180% over the past year, resulting in a forward price-to-earnings ratio of 79.82 times, compared to 34.72 times for Broadcom (AVGO).

This meant that a small improvement in earnings was not enough to satisfy investors, who were eagerly awaiting evidence that the company's new custom-chip relationship with Alphabet (GOOG)(GOOGL) would immediately boost results.

Management confirmed that the revenue contribution from the Google partnership would not be realized until fiscal 2029 and beyond. Additionally, there is a near-term margin challenge, as Marvell anticipates non-GAAP gross margin to decline slightly from 58.9% in Q2 to 57.5% to 58.5% in fiscal Q3 due to the shift towards custom silicon.

Despite these challenges, Morgan Stanley raised its price target for Marvell to $246 from $224, maintaining an Equal Weight rating. The firm now expects data center growth of 60% in fiscal 2027, up from 50%, and anticipates Marvell's revenue to reach approximately $18 billion in fiscal 2028, with its custom business expected to double as AI opportunities translate into revenue.

While the company's valuation remains a significant risk, this decline in stock price presents an opportunity for long-term investors to acquire a stronger Marvell at a lower price, with an extended, multi-year growth ramp.