1 Top Chip Stocks Reporting Massive AI Growth – Why Aren't Stocks Growing?

After a solid rally in 2023 and a hot start to 2024, shares of the chip designer Marvell Technology Group (NASDAQ: MRVL ) Artificial intelligence (AI) chips have failed to participate in the stock surge this year. That's a troubling situation, as Marvell currently has plenty of pieces to compete with a superior semiconductor stock. Broadcom (NASDAQ: AVGO ).

Is there something wrong with Marvel? And can management get the stock back into gear soon?

Marvel's AI boom falters once again.

These days, thanks to a number of acquisitions over the past few years, Marvell makes the bulk of its chip design revenue from data center customers. In fact, nearly 70% of revenue in the first quarter of 2025 (the three months ending in April) was classified as “data center” sales. This includes large data center operators (such as the “Magnificent Seven”) that want to customize some of their chips and hire Marvell for some support, or companies that make data center servers (such as Deal or Super Microcomputer).

In this bull market where all things AI seem to be keeping the economy afloat, the tilt towards data centers is a good thing. The segment, which includes AI-specific products, grew an impressive 87 percent year-on-year compared to the previous quarter.

There's just one problem: Marvel is diversified, and its remaining revenue segments have been in steep decline for nearly two years, thanks to a nasty bear market since the peak of the pandemic.

Data Source: Marvell Technology Group. YOY = year over year. QOQ = quarter over quarter.

As a result of this diversified product and end-market chip offering, Marvell's overall sales fell again last quarter, down 12% year over year. And despite the continued strength of the AI ​​product, revenue is once again expected to decline 7% year-over-year in Q2 — although the good news is that Marvell is returning to sequential growth.

In addition, due to multiple acquisitions to shift toward data centers and AI, Marvell remains unprofitable on a generally accepted accounting principles (GAAP) basis (excluding non-cash payments for past acquisitions). due to expenses), although free cash flow remains in healthy positive territory.

The story continues.

Is it time to sell stocks?

As of this writing, Marvell traded 53 times trailing 12-month free cash flow. That's actually a premium to its larger peer, Broadcom (39 times free cash flow), which has managed to stay in growth mode throughout the bear market over the past two years, and is highly profitable to boot. .

Granted, there are some green shoots for Marvel. It's too early to say for sure, but comments from management and most other chip industry executives indicate they expect overall semiconductor sales to finally recover in the back half of 2024. This could mean that Marvel's shrinking markets could finally get involved in AI. Market Party. Marvell's return to profitability could result in a dramatic improvement in valuation.

Nevertheless, after holding Marvell stock for nearly six years, I have decided to consolidate my holdings in Broadcom. I've owned Broadcom for even longer, and it has dramatically outpaced Marvel. My theory that a smaller competitor might be able to steal some of the design giant's thunder was misplaced. Broadcom is a leader for a reason, and I believe it is well-positioned to make the most of the AI ​​infrastructure race.

I understand that picking winners and losers is extremely problematic, so there are some alternatives that can show the investor something for both Marvel. And Broadcom: BroadTech Fund (software and hardware and everything in between) Vanguard Information Technology ETF (NYSEMKT: VGT )either or iShares Semiconductor ETF (NASDAQ: SOXX ) Just to focus on the chip stock.

If you don't want to choose which semiconductor companies will pay the best rents in the years to come.

Should you invest $1,000 in Marvell technology now?

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Nicholas Rossolillo and his clients have positions in Broadcom and the Vanguard World Fund-Vanguard Information Technology ETF. The Motley Fool has positions in and recommends iShares Trust-iShares Semiconductor ETF. The Motley Fool recommends Broadcom and Marvell Technology. The Motley Fool has a Disclosure Policy.

1 Top Chip Stocks Reporting Massive AI Growth – Why Aren't Stocks Growing? Originally published by The Motley Fool.