The market for artificial intelligence (AI) chips has been dominated by Nvidia, which explains why the semiconductor giant recently delivered another stellar set of results for the third quarter of fiscal 2025 (which ended on Oct. 27).
The chipmaker's revenue shot up a whopping 94% year over year to $35.1 billion, while its immense pricing power helped it more than double its adjusted earnings to $0.81 per share. However, the market's reaction to Nvidia's outstanding results has been lukewarm. In fact, the stock has lost momentum and is down since releasing its latest report.
One reason why that may be the case is because of Nvidia's expensive valuation and worries that the company's growth trajectory is slowing down. The margin pressure that's going to be created by the quick production ramp-up of Nvidia's new generation of AI chips is probably another reason why the stock has been on shaky ground despite its impressive report.
However, there's another chip stock that isn't as expensive as Nvidia and has strung together healthy gains over the past three months. This company is set to release its next set of results on Dec. 3, and there is a good chance that its performance will be solid enough to give the stock a nice shot in the arm.
Let's take a closer look at this name.
Robust demand for custom AI chips has helped this chipmaker
While Nvidia has been the go-to provider of graphics processing units (GPUs) that are deployed in data centers for AI training and inference, there is another family of chips that's gaining acceptance in AI servers. Application-specific integrated circuits (ASICs) are custom chips that are different from GPUs.
While GPUs are used for general computing purposes and are capable of processing huge amounts of data in a parallel manner, ASICs are used for performing specific tasks. The advantage of ASICs is that since they are programmed to perform a specific task, they are more efficient at carrying that task out, as they consume less power.
Not surprisingly, the market for AI-specific ASICs is expected to grow at an annual rate of 32% through 2030, according to market research firm Lucintel. One way investors can make the most of this market is by investing in shares of Marvell Technology (MRVL -1.81%), a designer of custom chips that has witnessed a nice turnaround in its fortunes thanks to AI.
Marvell is set to release its fiscal 2025 third-quarter results after the market closes on Dec. 3. Shares of the company have shot up an impressive 33% since it released its previous quarterly report on Aug. 29. This surge can be attributed to the fast-growing demand for Marvell's custom chips, which are helping it offset weak demand in other segments.
More specifically, the chipmaker's overall revenue was down 5% year over year in fiscal Q2 to $1.27 billion. Its non-GAAP (adjusted) earnings fell to $0.30 per share from $0.33 per share in the same quarter last year. However, a terrific year-over-year increase of 92% in Marvell's data center revenue to $881 million overshadowed the declines in its revenue and earnings.
The company has guided for $1.45 billion in revenue for fiscal Q3, which would be a slight improvement over the year-ago period's reading. Consensus estimates are projecting Marvell to finish the current fiscal year with $5.54 billion in revenue, which would be nearly flat from the same period last year. Additionally, its earnings are expected to decline to $1.46 per share from $1.51 per share in the previous fiscal year.
The good part is that Marvell's top and bottom lines are expected to accelerate nicely over the next couple of fiscal years.
MRVL Revenue Estimates for Next Fiscal Year data by YCharts
Marvell's long-term prospects are solid
Given the health of the market for custom AI chips, it is easy to see why analysts are expecting Marvell to step on the gas. The company expects to end fiscal 2025 with AI revenue of $1.5 billion, a figure that's expected to jump to $2.5 billion in fiscal 2026. More importantly, Marvell is forecasting a big surge in its addressable market thanks to AI. The company expects its data center total addressable market (TAM) to jump to $75 billion in 2028 from $21 billion in 2023.
Marvell points out that $43 billion of this TAM is attributable to the growing demand for custom compute chips. Meanwhile, another $26 billion will come from data center switching and interconnect markets. It is worth noting that Marvell is making progress in both these areas. It expects a third of its AI revenue in the current fiscal year to come from custom compute chips, with the remaining coming from the AI-focused data center connectivity space.
More importantly, Marvell has been able to bring on board new customers for its AI chips. This was evident from CEO Matt Murphy's comments on the previous earnings conference call: "Our AI custom silicon programs are progressing very well with our first two chips now ramping into volume production. Development for new custom programs we have already won, including projects with the new Tier 1 AI customer we announced earlier this year, are also tracking well to key milestones."
As such, there is a good chance that Marvell will be able to deliver better-than-expected results and top it off with a sunny outlook. That's the reason why buying this stock before Dec. 3 could be a smart move as it is currently trading at 37 times forward earnings, which isn't all that expensive considering how fast its bottom line is expected to grow over the next couple of years.
