Should You Buy Marvell Technology Stock After Its Post-Earnings Dip?

When a company announces its latest earnings, the resulting news can greatly influence its stock price. A significant drop in a stock can sometimes present a valuable investment opportunity. However, it is essential to understand why the stock fell to avoid purchasing a stock that may continue to decline.

Recently, Marvell Technology (MRVL) released its earnings report, and the immediate aftermath saw a sharp decline in its share price. The stock dropped by approximately 27% to close at $65.67 shortly after the announcement. Prior to this earnings report, the stock was already facing downward pressure, primarily due to ongoing concerns about tariffs and trade wars. Overall, in the month leading up to this announcement, Marvell's stock had plummeted over 40%.

This raises a crucial question: does this substantial decline indicate a good buying opportunity for Marvell stock, or should investors be cautious and possibly avoid what might be the beginning of a more significant downturn?

Sales Growth Accelerates, but Future Guidance Raises Flags

Marvell's recent quarterly performance showed solid figures; the company reported revenues of $1.82 billion for the period ending February 1, a 27% increase from the previous year. This growth rate is notably faster compared to its recent quarters.

Moreover, the company has gained from the surge in artificial intelligence (AI) technologies, as it provides custom chips tailored for various businesses. However, AI spending has recently come under scrutiny, particularly following the launch of a new chatbot by the Chinese firm DeepSeek. This new product reportedly cost significantly less to develop compared to ChatGPT from OpenAI, indicating that the current spending on AI may be overinflated.

Strong earnings alone may not be sufficient to uplift a stock’s price if investors foresee a looming economic slowdown. Such expectations can lead to further sell-offs.

Investor concerns have largely stemmed from Marvell's guidance. For the upcoming quarter, the company has projected revenues at around $1.88 billion, only slightly above its previous quarter's results and falling short of the $2 billion anticipated by some market analysts.

Stock Price Is Not Near Its 52-Week Low

The drastic decline seen in Marvell's stock this year has pushed it down to levels not observed in recent months. However, to reach its 52-week low of $53.19, the stock would need to decline an additional 19% from its recent closing price. Currently, Marvell trades at a forward price-to-earnings (P/E) ratio of less than 24.

It's essential to note that forward P/E ratios are based on analysts' estimates and can fluctuate based on not just Marvell's outlook but the broader economic situation, which is presently uncertain due to trade tensions. The average stock in the Technology Select Sector SPDR Fund holds a forward P/E of around 25, making Marvell slightly more affordable, albeit not by a large margin.

While Marvell reported a profit of $200 million in its latest quarter, it has experienced profitability challenges in the past. Over the previous year, the company incurred a net loss of $885 million against total revenues of $5.8 billion. Rising costs from trade wars could further affect Marvell's revenues, particularly since China represents a crucial market for the company amid recent tariff increases imposed by the U.S.

Is There Potential for Marvell Stock to Bounce Back?

Marvell and other stocks in the AI sector face several challenges this year, including lofty valuations. While Marvell’s stock is cheaper than it was prior to its decline, there is a risk that the situation could worsen if trade tensions—especially between the U.S. and China—continue to escalate.

If investors are prepared to be patient and willing to take on risks, Marvell stock could potentially be a worthwhile purchase at this time. The company has shown efficient scaling and profitability. Although ongoing trade conflicts could hinder progress in the short term, these circumstances may not pose long-term issues, as government policies can shift significantly depending on different administrations.

While a substantial stock recovery may not be imminent unless trade tensions ease, individuals willing to hold onto their investments for the long haul may find Marvell to be a solid option in the AI sector.

David Jagielski has no position in any of the stocks mentioned. The Motley Fool recommends Marvell Technology. The Motley Fool has a disclosure policy.

Marvell, Stock, Investment