Marvell Technology: Comprehensive layout of Ethernet communication chips, benefiting from the AI Ethernet networking trend.

Source: Guojin Securities

Investment Thesis:

The company is one of the leading manufacturers of Ethernet communication chips, with a comprehensive layout of high-speed communication chip products. It is expected to benefit significantly from the trend of data center upgrades and AI Ethernet networking.

Currently, the company's data center products include optical module DSP, switching chips, Ethernet PHY chips, etc. The company is a leading manufacturer of optical module DSP and is expected to benefit from the strong demand for 800G optical modules driven by volume growth. Additionally, the company is one of the few manufacturers with a 51.2T Ethernet switching chip. AMD and cloud providers use Ethernet networking for their self-developed chips, and the volume is expected to drive the application of Ethernet in AI networking, boosting the demand for Ethernet communication products.

According to AMD's 23Q4 performance meeting, AMD is expected to achieve $3.5 billion in sales in 24, and the supply side can support more sales. AI networking generally adopts a fat tree architecture. According to our calculations, a cluster of 16,000 servers using a fat tree architecture requires 2,000 switches. As a leading manufacturer of Ethernet communication chips, the company is expected to benefit. Additionally, the company has the design capability of Arm architecture processors, rich data communication IP, high-speed interconnection capabilities, and advanced packaging technology, which are expected to benefit from the trend of cloud providers' self-developed chips. According to the company's December 23 telephone conference, the company has already received demand for custom chips from cloud providers, with two AI custom chips expected to contribute strong revenue growth in 24. In traditional cloud computing, server OEM raw material inventory has returned to the level of 20, while switch OEM manufacturers' revenue continues to grow. As terminal manufacturers resume normal shipments, cloud computing will also drive demand for the company's products.

The company has deep technical expertise in in-vehicle Ethernet and is expected to fully benefit from the trend of in-vehicle Ethernet brought about by vehicle intelligence. According to the company's Investor Day public materials, the company is the first in the world to achieve 1G in-vehicle Ethernet PHY chips and 10G in-vehicle Ethernet PHY chips. The company has a rich product line, with a wide range of downstream applications covering data centers, communication infrastructure, enterprise networks, consumer electronics, automotive, industrial, and other fields.

Profit Forecast, Valuation, and Rating

We expect the company's revenue for the fiscal years 24-26 to be $5.698 billion, $6.581 billion, and $7.169 billion, respectively, with year-on-year growth rates of -3.74%, +15.49%, and +8.93%. The net profit attributable to the parent company is expected to be -$51.3 million, -$12.9 million, and -$1.9 million, respectively. Referring to comparable companies, we assign a 12x PS multiple to the company for the fiscal year 25, corresponding to a target price of $91.35. We initiate coverage with a "Buy" rating.

Risk Warning

The progress of Ethernet AI networking may fall short of expectations; the introduction of downstream customers may fall short of expectations; intensified competition in the optical module DSP industry; intensified competition in the chip customization industry; and the progress of chip customization services may fall short of expectations.