MRVL's Margin Pressure Mounts as AI Revenues Rise: Is it Sustainable?

Marvell Technology’s MRVL top line is growing on the back of custom AI silicon chips that are experiencing massive traction among hyperscalers. However, Marvell Technology’s gross margin has been moving inconsistently for the past several quarters, with a long-term declining trend.

MRVL’s robust top-line growth is coming from the massive traction in its custom AI XPUs, electro-optics solutions and custom high bandwidth memory chips, which enable longer reach scale-up fabric connections for custom AI servers and improve bandwidth. The Co-Packaged Optics improves performance by increasing XPU density.

However, Marvell Technology’s custom AI silicon, including XPUs, which are driving its revenue growth, comes with higher costs associated with manufacturing these chips. The margin in the AI-focused custom silicon semiconductor business is fundamentally lower, further affecting MRVL’s total gross margin.

Marvell’s non-GAAP gross margin has declined 260 basis points from the year-ago quarter and 30 basis points sequentially to 59.8% in the first quarter of fiscal 2026. For the second quarter of fiscal 2026, MRVL has projected a non-GAAP gross margin range of 59% to 60%, which is lower than the second quarter of fiscal 2025’s gross margin of 61.9%.

Nevertheless, as MRVL’s other business segments are on the path of recovery so this margin pressure might ease out in the long run.

How Competitors Fare Against MRVL

The contraction in gross margin is not the only challenge faced by MRVL stock at present. The company also faces massive competitive pressure from Broadcom AVGO and Advanced Micro Devices AMD in the custom silicon solutions space.

Broadcom’s advanced 3.5D XDSiP packaging platform is specifically designed to enhance the performance and efficiency of custom AI XPUs. Broadcom’s Semiconductor segment, which accounts for its custom silicon solutions, grew 11% year over year in the first quarter of fiscal 2025.

Advanced Micro Devices’ custom silicon solutions and AI accelerators, like Instinct Accelerators, power numerous data centers. Advanced Micro Devices’ reconfigurable Alveo Adaptable Accelerator Cards are used to speed up compute-intensive applications in data centers.

MRVL’s Price Performance, Valuation and Estimates

Shares of Marvell have lost 32.2% year to date against the Electronics - Semiconductors industry’s growth of 13.3%.

From a valuation standpoint, Marvell Technology trades at a forward price-to-sales ratio of 7.23X, lower than the industry’s average of 8.63X.

The Zacks Consensus Estimate for Marvell Technology’s fiscal 2026 and 2027 earnings implies year-over-year growth of 77.7% and 27.73%, respectively. The estimates for fiscal 2026 and 2027 have been revised upward in the past 30 days.

Marvell Technology currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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This article originally published on Zacks Investment Research (zacks.com).

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