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

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In after-hours trading on Tuesday, December 2, shares of semiconductor products company Marvell Technology soared. Its much better-than-expected guidance for next fiscal year's data center business growth overshadowed a muted overall outlook, rekindling investor confidence in this specialized custom chip maker.

The company’s shares initially fell 5% after the earnings release, but reversed course after executives provided strong forecasts for the data center business during the earnings call, surging as much as 14% in after-hours trading.

The key driver behind the stock surge was CEO Matt Murphy’s comment during the call that the company expects “year-over-year data center revenue growth to exceed 25% in the next fiscal year.” This guidance surpassed Wall Street expectations and sent a positive signal to the market about momentum in AI hardware, Marvell’s core business.

The initial weakness in the share price likely stemmed from Marvell’s conservative fourth quarter overall guidance, which didn’t surprise the market. The dramatic reversal highlights that, in today’s environment, investors are more focused on long-term growth prospects from AI-related business, rather than short-term performance fluctuations.

Performance In Line With Expectations, Key Guidance Changes Market Sentiment

According to its financial report, Marvell posted adjusted earnings per share of 76 cents for the third quarter, with revenue at $2.08 billion. FactSet survey data showed analysts previously expected EPS of 74 cents and revenue of $2.07 billion, meaning actual results slightly beat expectations.

Notably, the data center business, the company’s main revenue driver, performed solidly, with revenue rising 38% year-over-year to $1.52 billion, slightly above Wall Street’s estimate of $1.51 billion. CEO Matt Murphy said in the report that third-quarter revenue was “driven by robust demand for data center products.”

Despite the strong third quarter, Marvell’s overall outlook for the fourth quarter was more cautious. The company expects adjusted EPS of 79 cents (plus or minus 5 cents), and revenue of $2.2 billion (plus or minus 5%). This matches analyst forecasts of 79 cents per share and $2.18 billion in revenue, but didn’t provide any major surprises to the market.

However, it was Murphy’s additional comments about next fiscal year’s outlook in the conference call that completely changed market sentiment. His forecast of over 25% growth in the data center business gave investors a shot of confidence.

Murphy also added that this optimistic forecast does not include the company’s recently announced acquisition plans. Marvell announced the same day that it would acquire AI startup Celestial AI in a deal worth about $3.25 billion in cash and stock.

Market Divide and ASIC Prospects

Fueled by the AI boom, Marvell’s stock surged 83% in 2024, but has fallen 16% so far this year, reflecting continuing doubts over its ability to win long-term orders amid fierce competition.

The core of investors’ disagreement lies in the outlook for custom ASIC chips (Application Specific Integrated Circuits). ASICs are chips designed for specific uses, such as Google’s TPUs, and are seen as potential alternatives to Nvidia’s GPUs. According to UBS analyst Timothy Arcuri in a November 23 report, “Investors continue to view custom ASICs as a binary outcome—either you get the order, or you’re out.”

However, Arcuri believes the reality is that most customers are diversifying, ‘using not only multiple GPU suppliers but also multiple ASIC suppliers,’ which bodes well for companies like Marvell. He currently has a ‘Buy’ rating on Marvell with a target price of $110. Marvell’s strong guidance on Tuesday seems to provide new support for this optimistic view.

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