Marvell’s Chips Are Moaty and Ready To Take On Competition in Clouds, AI, and 5G

Analyst

William Kerwin

We view Marvell Technology as a strong competitor in networking chips, resulting from a multiyear business pivot using acquisitions, divestitures, and organic development to focus on the cloud, 5G, and automotive markets. In our view, the new-look Marvell offers strong growth potential, impressive profitability, and a healthy competitive position. Between switching, network processing, and optical chips, Marvell has one of the broadest networking silicon portfolios in the world, and we believe it is primed to grow faster than its underlying markets as future networking setups utilize greater content and we anticipate Marvell will continue to win sockets over competitors. 

We expect Marvell to continue competing at the cutting edge of networking silicon with chip heavyweights like Broadcom, Nvidia, and Intel. Marvell’s billions in cumulative R&D investment, both organically and via acquisitions, has generated design prowess, and we see its strong customer relationships with cloud providers and networking equipment vendors alike as sticky. Marvell wins designs using its broad portfolio of intellectual property to create tailored or customized solutions, and earns impressive profits while doing so. In our view, Marvell merits a Narrow economic moat rating.

Marvell’s recent financial history has been choppy through the firm’s transformation and pivot toward the cloud. We think reorganization and transformative acquisitions are squarely in the firm’s rearview mirror. We anticipate smaller, bolt-on acquisitions going forward, but see Marvell’s focus now turning to organic growth and share gains. We believe the firm has a growing addressable market as next-generation networks use heavier processing and optical content, and Marvell’s cross-selling into existing customers is in its early innings. We expect Marvell to continue investing heavily into R&D to defend its moat against the likes of Nvidia, Intel, Broadcom, and Cisco’s chip business.

Business Strategy & Outlook

We assign Marvell Technology a narrow economic moat rating. In our view, Marvell holds intangible assets in networking chip design that enable it to compete at the cutting edge and defend its competitive position from well-capitalized competition, and also benefits from switching costs. We expect Marvell to earn excess returns on invested capital, more likely than not, over the next 10 years.

To us, intangible assets in networking chip design come in the form of engineering expertise, both in terms of silicon design and integration with complementary hardware and customer networking topologies, which results from decades of development, R&D expense, and engraved customer relationships. In our view, Marvell’s billions of dollars of cumulative R&D over the past decade have created a portfolio of differentiated intellectual property from which it can draw to build custom and semi-custom designs for myriad applications and customers. 

We contend that Marvell commands pricing power for its differentiated technology and design. We believe that customers pay for performance and features in their networking chips, and Marvell’s pricing power shows in its healthy gross margins as it aggressively adds new sockets and expands within existing customers. Marvell’s customers have shown a commitment to build greater portions of their networks on its chips, reflected in strong cross-selling and upselling activity. Marvell’s $100-plus million customer count has risen quickly from 13 in 2020 to 19 today. These customers include the likes of Microsoft, which sole-sources Marvell’s optical chips for its North American regional data centers. 

New chip generations with higher speeds allow networking equipment providers and end customers to improve network speed and performance, and transfer, store, and process more data. Beyond speed, performance as defined by a customer is affected by a wide variety of features like energy efficiency, memory, security, and specific network design characteristics. Marvell’s products are either tailored to a specific application within an end market, or semi-custom chips fine-tuned for an end customer’s networking architecture to allow easier software integration and desired feature sets. Marvell’s customers build networks according to its silicon feature sets, which creates an added level of stickiness, and design wins can last three to five years. As an incumbent, Marvell is in constant conversation with customers about roadmaps for their next technology generation and how to fine-tune a chip to future networking needs. Marvell’s most cutting-edge designs involve co-design from its large customers, which we see as a virtuous feedback loop of investment and IP that would be difficult for a new entrant to overcome.

Going forward, we believe networking technologies like switching, optical, and processing will become more intertwined. We see one example of this being switch chips that feature co-packaged optics technology and enable higher speeds. In our view, Marvell is one of a small handful of suppliers that has strong technology on each front and the breadth with which to serve several distinct end markets and applications—a position it has taken more than a decade and billions in R&D to develop. Though we see technological strength and differentiation in the firm’s switches, optical chips, and processors alone, we see even greater differentiation when combined into a tailored solution for an end market or specific customer. We believe higher levels of customization will elicit switching costs at customers, and believe Marvell may even generate R&D synergies in the future as technologies become intertwined. We expect Marvell’s organic investment to stay high over the long-term, keeping it at the forefront of design while pricing power maintains healthy profitability.

We see room for multiple moats in this market with established existing players, but we see significant barriers to entry for new entrants—in terms of investment, technological breadth, and customer relationships. We view moats in networking silicon as being carved by technological depth and breadth. Broadcom, Marvell, Intel, and NVIDIA have all devoted years and billions of dollars toward organic development of technology and customer relationships, as well as consistent acquisition activity to build out broader portfolios. Broadcom dominates this market but has been outpaced in growth by the likes of Marvell, Intel, and Nvidia behind higher investment and penetration of processing and optical technologies. We surmise that Marvell’s optical, switching, and processing products are among the market leaders, and we also suspect that Marvell’s investments in networking chips even surpasses Intel and Nvidia today.

We believe new entrants would struggle to develop a sufficiently deep and wide portfolio to compete for high-value design wins, especially without existing customer relationships. Even a well-capitalized networking vendor in Cisco has struggled to make material market share gains with its Silicon One chips, with what share it does have coming primarily from integration into its walled garden ecosystem. Cisco showed that heavy dollar investment could lead to parity in terms of raw speed, but that wasn’t enough to generate meaningful share gains without broader features and complementary technologies with which to accompany it. A new entrant without Cisco’s budget and existing relationships within networking would have an even steeper hill to climb, in our view, with the years of expense and development required not threatening Marvell’s moat.

Narrow

Economic Moat

Marvell Technology

Marvell Technology, Inc. engages in the provision of data infrastructure semiconductor solutions. It offers compute, networking, storage, and custom solutions. The firm designs, develops, and sells integrated circuits. The company was founded by Wei Li Dai, Pantas Sutardja, and Sehat Sutardja in 1995 and is headquartered in Wilmington, DE.

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Marvell Technology, Inc. (NASDAQ:MRVL ) Q3 2024 Earnings Conference Call November 30, 2023 4:45 PM ET Company Participants Ashish Saran - SVP of IR Matt Murphy - Chairman and CEO Willem Meintjes - CFO Conference Call Participants Toshiya Hari - Goldman Sachs Timothy Arcuri - UBS Vivek Arya - Bank of America Merrill Lynch Harsh Kumar - Piper Sandler Tore Svanberg - Stifel Ross Seymore - Deutsche Bank Matt Ramsay - TD Cowen Ambrish Srivastava - BMO Harlan Sur - JPMorgan Christopher Rolland - Susquehanna Srini Pajjuri - Raymond James Chris Caso - Wolfe Research Operator Good afternoon, and welcome to Marvell Technology Inc. Third Quarter of Fiscal Year 2024 Earnings Conference Call. All participants will be in listen-only mode.

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