Should You Buy Marvell Stock Instead of ARM Stock? | MRVL Stock vs. ARM Stock

SUMMARY

Parkev Tatevosian, CFA, examines the investment prospects of Marvell and Arm Holdings as both companies expand into the data center market. The analysis covers revenue growth, profit margins, and valuation metrics to determine which stock may offer better value in the current environment.

MAIN POINTS

• Arm Holdings and Marvell are gaining investor attention as they expand into the data center market, prompting a head-to-head comparison. [0:00]
• Arm Holdings is moving beyond licensing to develop proprietary chips, while Marvell is helping companies diversify away from Nvidia chips in data centers. [1:02]
• Arm Holdings has historically better profit margins, but these may converge with Marvell's as both adapt to new market dynamics. [2:02]
• Valuations for both companies have surged, with Arm Holdings trading at a much higher forward price-to-earnings ratio than Marvell. [3:00]
• Both stocks are considered overvalued based on discounted cash flow analysis, with recent price increases outpacing intrinsic value estimates. [4:01]
• Given current valuations and market positioning, Marvell is favored over Arm Holdings for new investment. [5:02]

DETAILED ANALYSIS

Arm Holdings and Marvell Technology are both experiencing heightened interest from investors as they strategically expand into the rapidly growing data center market. Over the past three years, Arm Holdings has demonstrated an acceleration in its compounded annual revenue growth rate, rising from 14% to 22.5%, while Marvell has also improved, increasing from 8.9% to 11.4%. This growth is expected to continue, particularly for Arm Holdings, which is transitioning from a licensing and royalty-based model to developing and selling proprietary chips for data centers.

This shift could drive higher revenues, though potentially at the expense of lower profit margins due to the increased costs associated with manufacturing and selling physical products.

Marvell, on the other hand, is supporting companies in building proprietary chips, aiming to reduce reliance on Nvidia and capture a larger share of the data center market. Both firms are positioned to benefit from the current supply constraints and robust demand for data center technology, which is being driven by the proliferation of artificial intelligence applications and cloud computing.

When comparing operating profit margins, Arm Holdings has historically outperformed Marvell, but the gap may narrow as Marvell enters a cyclical upswing and operates closer to full capacity, spreading fixed costs over greater sales volume. Arm Holdings' new business model introduces uncertainty regarding future margins, as it has not previously engaged in large-scale chip manufacturing and sales.

Valuation metrics reveal that both companies are trading at elevated levels, with Arm Holdings at a forward price-to-earnings ratio of 110 and Marvell at 48. The surge in valuations has been particularly notable since the announcement of a ceasefire in Iran, which contributed to a broader market rally. However, recent pullbacks suggest that valuations may be stretched.

Discounted cash flow analysis indicates that Arm Holdings, trading at $213, significantly exceeds its intrinsic value of $85, while Marvell, at $181, is also above its intrinsic value of $115. Both stocks are thus considered overvalued in the current market environment. Despite this, Marvell is viewed as the preferable option due to a less pronounced valuation premium and favorable positioning in the data center sector.

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