Marvell: Challenging the "trillion" Broadcom, can ASIC ignite the counterattack?

Under the continuous promotion of the current AI computing power revolution, customized ASIC chips have gradually attracted market attention. As core players in the ASIC market, the stock prices of Broadcom and Marvell have also seen significant increases recently.

From the current business situation of $Marvell Tech(MRVL.US), driven by AI demand, the data center business has grown to become the company's largest source of revenue, accounting for nearly 70%. In addition, the company's traditional businesses include enterprise networking, carrier infrastructure, automotive industry, and consumer-related businesses.

Although the company's data center business revenue is growing rapidly (almost doubling), the company's overall revenue has not seen significant growth recently, mainly due to the drag from traditional businesses such as enterprise networking and carrier infrastructure (other businesses have seen double-digit declines). Despite the poor performance of the company's traditional businesses, the stock price has continued to rise because the market's main focus on the company is the growth potential of the data center business (which has maintained a year-on-year growth rate of over 80% for the past three quarters).

This article by Dolphin will focus on Marvell's business operations, with an emphasis on the data center and AI businesses, while the next article will focus on the company's specific performance calculations and valuation situation.

In the company's data center business, it mainly includes ASIC, optoelectronic products, Ethernet switch chips, storage products, etc. The data center business can be divided into two parts: ASIC and other businesses:

1) ASIC Business: Provides new growth for the company's data center business, Dolphin expects the company's ASIC revenue in 2024 (i.e., fiscal year 2025) to reach $500-600 million, most of which is pure incremental revenue for the company this year.

Benefiting from the mass production and shipment of ASIC products by Amazon and Google, the company has entered the first tier of ASIC design, currently holding a single-digit market share. However, with the growing demand from major cloud service providers, the company is expected to further expand its customer base and scale. The company anticipates that the overall ASIC market will achieve a 45% compound growth rate between 2023 and 2028, and it expects its long-term market share to exceed 20%, therefore the company's ASIC revenue compound growth rate over the next five years will exceed the industry average of 45%.

2) Other Businesses: Before the ramp-up of ASIC, the company's data center business mainly consisted of optoelectronic products, switch chips, etc.

① Optoelectronic Products: The company's core product is the optical module DSP chip, which holds the number one position in the market. Driven by demand from AI and other sectors, the market's requirements for transmission rates have further increased. The company currently occupies over 60% of the global DSP market The company expects a compound growth of 27% in the overall optoelectronic products market between 2023 and 2028, which will also bring significant incremental benefits to the company;

② Ethernet Switch Chips: The company's switch chips are also in the first tier, slightly behind Broadcom, lagging by about a year. The market for high-end switch chips is relatively stable, and the company will continue to play the role of a challenger. The company expects a compound growth of 15% in the overall switch chip market between 2023 and 2028, and the company will benefit from industry growth;

③ Storage Products: The company started its business relying on storage products, but with the decline of hard drives, the proportion of the company's storage business has fallen to about 10%. Currently, the company's storage business mainly focuses on enterprise-level SSD controller chips, and the industry landscape is relatively stable. The company expects a compound growth of 7% in the related storage market between 2023 and 2028.

The company began strategic adjustments in 2016, and by 2024, 70% of the company's total revenue will come from data center business, with the business adjustment basically completed. As AI demand grows and deep ties with major clients develop, the company's performance will continue to benefit from the growth of ASIC and data center businesses in the future.

This article mainly focuses on Marvell's business situation and looks at the rise in the company's stock price from a qualitative perspective: part of it includes the realization of the company's business transformation (with data center revenue accounting for 70%), and another part includes the high growth expectations in the ASIC sector where the company operates. The next article by Dolphin will analyze the company's profit expectations and performance estimates from a quantitative perspective, as well as valuation analysis.

Dolphin's specific analysis of Marvell Technology (MRVL.O) financial report is detailed below:

1. Source of Marvell's AI Technology

From the company's development history, Marvell started with storage technology, and its growth process is similar to Broadcom, mainly achieved through "external mergers and acquisitions to expand business capabilities." Between 2000 and 2016, the company entered the wireless communication and mobile processor fields through acquisitions, but did not achieve significant success, which led to the company's stock price hovering below $20 for over a decade.

While Marvell struggled to find its direction, the company changed its CEO in 2016 and clearly defined semiconductor solutions for data centers as the main development direction for the future. Subsequently, the company divested its mobile communication business and some consumer businesses, and completed acquisitions of Cavium, Aquantia, Avera, Inphi, and Innoviun, thereby building the company's key capabilities in customized ASICs and network interconnection in the data center market. Essentially, Marvell's capabilities in AI and ASICs mainly come from "external mergers and acquisitions." With the implementation of this series of acquisitions, Marvell's stock price has seen an increase. Based on the completion of its initial layout, the company has also caught up with the current wave of data center and AI industry trends, with its stock price surpassing $100, reflecting the market's confidence in Marvell's future development in the AI sector.

Since Marvell primarily expands through "external acquisitions," the company's debt-bearing capacity will be an important indicator of its sustainable development. Under the influence of a series of acquisitions, the company's "Total Debt/LTM Adjusted EBITDA" ratio once rose significantly. However, with the integration of the company's business and the recovery of its operations, its debt-bearing capacity is also increasing.

In recent quarters, the company's "Total Debt/LTM Adjusted EBITDA" ratio has fallen back to around 4.8 times, but there is still a considerable gap compared to Broadcom's 3.1 times. Considering the Adjusted EBITDA% of both companies, Broadcom's adjusted EBITDA% reached 64.7%, far better than Marvell's 34.7%, indicating that Broadcom is likely to reduce its ratio back to pre-acquisition levels more quickly. Meanwhile, Marvell is unlikely to initiate large-scale acquisitions in the short term, instead focusing on enhancing its operational capabilities.

II. Marvell's Data Center Business

Currently, Marvell's operational focus is on its data center business, which is also the main point of market attention. Driven by demand from AI and other sectors, the revenue share of the company's data center business has increased to over 70%, directly impacting the company's performance. This article will primarily revolve around the company's data center.

After a series of acquisitions, Marvell has acquired capabilities in ASICs, optical module DSP chips, Ethernet switch chips, and storage controller chips. In the data center business, it can be specifically divided into AI and non-AI segments, with the AI segment primarily corresponding to the market demand for AI servers.

Looking at the changes in the company's stock price, Marvell's stock price has doubled from $50 in December 2023 to over $100. During this period, the share of the company's AI business in total revenue increased from 5% to over 30% It can be seen that the growth of the AI business is the main driving force behind the company's recent stock price increase.

Before the volume of ASICs increased, communication interconnection products and storage businesses had always been the most important parts of the data center business, mainly including the company's optical module DSP and other optoelectronic products, Ethernet switch chips, storage controller chips, and so on. With the completion of the acquisitions of Inphi and Innovium, the company further enriched its data center-related products.

2.1 Optical Module DSP

In data centers, optical modules are mainly used for data transmission between servers in optical fiber communication, as well as between servers and storage devices, which mainly include optical chips and electrical chips. Marvell's main products are DSP (Digital Signal Processing chips), TIA (Transimpedance Amplifiers), and Driver chips in the electrical chip category.

Among the company's electrical chip products, DSP is relatively more important: 1) The technical threshold for DSP is relatively high, and currently, the main players in the market are Marvell and Broadcom, with a combined market share of nearly 90%; 2) Among the energy consumption of various chips in optical modules, DSP accounts for the highest proportion, nearly half of the energy consumption in 400G optical modules; 3) DSP directly affects the communication speed of optical modules.

The company's DSP technology mainly comes from Inphi. After the acquisition, Marvell was the first in the industry to launch a technical product with a single-channel rate of 200Gbps for 1.6T optical module scenarios, further meeting the demands of AI computing. Currently, in the company's data center business, part of the revenue from optoelectronic chips is included in AI revenue, while another part is included in non-AI revenue.

Dolphin believes that the overall increase in server demand will drive both AI and non-AI revenues to grow, with the revenue growth of optoelectronic products in AI scenarios being more pronounced. For the optoelectronic products in the data center business, the company expects the optoelectronic market to have a compound growth rate of 27% over the next five years.

2.2 Ethernet Switch Chip

Ethernet switch chips are key components of switches, mainly used for the preprocessing and forwarding of data packets. As data centers' requirements for data processing increase, the mainstream ports in the market are gradually shifting from 200G/400G to 800G.

Marvell's current technological capabilities mainly come from the acquisition of Innovium. After the acquisition, Marvell's switch chip products are aimed at the complete high, medium, and low-end markets. The company's original Prestera series is positioned in the mid-to-low end, mainly used for enterprise networks and edge markets; while Innovium's Teralynx series products will be positioned in the mid-to-high end, primarily targeting data centers and AI scenarios

Currently, Marvell's Ethernet switch chip products, while slightly inferior to Broadcom, are still in the first tier. Currently, the high-end products of various companies all have a bandwidth of 51.2Tbps, with the highest port rate reaching 800G, and the product performance is basically similar, but the company's production capacity and technological research and development are about one year behind Broadcom.

Driven by the demand for AI and cloud services, the company expects the overall market size for switch chips to have a compound annual growth rate of 15% over the next five years. Although Marvell is currently still in a catching-up role, it is expected to benefit from the industry's growth.

2.3 Storage Products

Although it started with hard disk controller chips, after years of development and external acquisitions, the company's storage business now accounts for less than 20%. Currently, the company's storage products are mainly focused on the enterprise SSD market, where it still holds a relatively advantageous position in the enterprise SSD controller chip market.

Currently, Marvell's storage products are primarily Bravera. Although the company has a low market share in the consumer hard disk controller chip market, it remains relatively stable in the enterprise market. Driven by demand from data centers and other areas, the company's storage business is expected to benefit. Marvell expects the storage market it operates in to have a compound annual growth rate of 7% over the next five years.

3. New Driving Force for Data Centers - ASIC

In terms of AI computing power, major cloud service providers previously mainly adopted GPU solutions. However, ASICs, with their high performance and low power consumption characteristics in specific application scenarios, are expected to meet the customized needs of large cloud service providers, thereby expanding the demand scale for ASICs in the computing power market.

The company's ASIC revenue is expected to see significant growth starting in 2024 (the 2025 fiscal year). Based on company communications and industry chain information, Marvell's current ASIC revenue mainly comes from Amazon's Trainium 2 and Google's Axion Arm CPU processors, and the Inferential ASIC project in collaboration with Amazon is expected to begin mass production in 2025 (the 2026 fiscal year). The Microsoft Maia project in collaboration with Microsoft is expected to launch in 2026 (the 2027 fiscal year).

Since the emergence of ChatGPT, the market demand for AI computing power has been continuously increasing. In the face of supply shortages, a situation has arisen where Nvidia "dominates the market." However, major cloud service providers are unwilling to be long-term dependent on Nvidia's products and have begun to layout their own chip development In addition to collaborating with Google to develop ARM CPUs, the company's current major customer for computing power is Amazon.

In comparison between AI ASIC products and NVIDIA GPUs, Google's latest TPUv6e computing power is currently the most advanced among the ASIC chips from the four major manufacturers, approaching the level of NVIDIA's H100, roughly lagging behind NVIDIA GPUs by two years.

Additionally, Marvell's Trainium 2, in collaboration with Amazon, has computing power roughly between the A100 and H100 levels, which is also the main source of growth for the company's ASIC revenue in 2024.

Although some manufacturers have achieved large-scale production in the AI ASIC market, their share remains low compared to the overall AI chip market. Looking at the revenue from the data center businesses of NVIDIA, AMD, and Intel, the combined annual revenue of the three has exceeded $100 billion. However, the market size for ASICs in 2024 is still less than $15 billion, accounting for less than 10% of the overall AI chip market.

Based on industry chain information, Dolphin believes that Broadcom is still the "big boss" in the current ASIC market. Benefiting from the growth in shipments of Google TPUs, Broadcom's ASIC revenue in 2024 has reached over $8 billion, capturing the largest share of the ASIC market. Marvell's ASIC revenue in 2024 is approximately $500-600 million, accounting for less than 10% of the market. Additionally, companies like Chipone and GUC have also gained remaining market shares through collaborations with Intel, Microsoft, and others.

Although Marvell's market share is currently lower than Chipone's, Dolphin believes that Marvell's market share is expected to surpass in the future. With a series of accumulated technological capabilities, Broadcom and Marvell can participate in multiple stages of front-end logic design and back-end physical design, while Chipone mainly engages in back-end physical design, which also allows Broadcom and Marvell to have higher gross margins than companies like Chipone.

Furthermore, Chipone's current clients are mainly Intel and Amazon, but recently Marvell has reached a five-year cooperation agreement with Amazon, which is expected to further deepen their partnership. The Inferential ASIC project that Marvell is collaborating on with Amazon is also expected to achieve mass production in 2025 (i.e., the 2026 fiscal year). The company's long-term goal is to capture over 20% of the AI ASIC market.

Considering the company's expectations and industry conditions, Dolphin believes that the ASIC business is likely to provide the greatest growth momentum for the company. Marvell's management expects that the ASIC market size in which the company operates is likely to achieve a compound annual growth rate of 45% in the next five years Due to the company's expectation that its market share will further increase, Marvell's ASIC revenue growth will exceed the industry's growth by 45%.

This article mainly focuses on the company's business aspects, sorting out the core business data center products. The next article will focus on the company's profit expectations and performance calculations, as well as valuation analysis.

Dolphin Investment Research ASIC related articles review:

Broadcom in-depth:

On December 4, 2024, the company in-depth article “Broadcom (AVGO.O): Soft and Hard Dual-Track, An Alternative Winner in the AI Computing Era”

On September 13, 2024, the company in-depth article “Broadcom: 'Buy, Buy, Buy' Paving the Way for 'Trillions'? Tencent and Alibaba, Take Note!”

Broadcom financial report:

On December 13, 2024, conference call “Broadcom: The AI Serviceable Market Size Will Reach 60-90 Billion in FY2027 (FY24Q4 Minutes)”

On December 13, 2024, financial report commentary “ASIC to Surpass GPU? Broadcom's Good Days Are Ahead”

On September 6, 2024, conference call “Broadcom: Demand for ASIC Will Increase More in 2025 (FY24Q3 Conference Call)”

On September 6, 2024, financial report commentary “Broadcom 'Surging'? AI Can't Support the Collapse of Traditional Semiconductors”

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