Networking chips designer Marvell Technology (NASDAQ: MRVL) reported results in line with analysts' expectations in Q2 FY2024, with revenue down 11.6% year on year to $1.34 billion. The company also expects next quarter's revenue to be around $1.4 billion, in line with analysts' estimates. Marvell Technology made a GAAP loss of $207.5 million, down from its profit of $4.3 million in the same quarter last year.

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"Marvell delivered second quarter fiscal 2024 revenue above the midpoint of guidance, and we are forecasting sequential revenue growth to accelerate in the third quarter. This growth is being driven primarily by AI and cloud infrastructure," said Matt Murphy, Marvell's Chairman and CEO.

Moving away from a low margin storage device management chips in one of the biggest semiconductor business model pivots of the past decade, Marvell Technology (NASDAQ: MRVL) is a fabless designer of special purpose data processing and networking chips used by data centers, communications carriers, enterprises, and autos.

The semiconductor industry is driven by demand for advanced electronic products like smartphones, PCs, servers and data storage. The growth of data and technologies like artificial intelligence, 5G networks and smart cars are also creating a next wave of growth for the industry. To keep up with ever changing customer needs requires new tools that can design, fabricate and test at ever smaller sizes and more complex architectures, and that is driving the demand for semiconductor capital manufacturing equipment.

Sales Growth

Marvell Technology's revenue growth over the last three years has been strong, averaging 29.1% annually. But as you can see below, its revenue declined from $1.52 billion in the same quarter last year to $1.34 billion. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions (which can sometimes offer opportune times to buy).

This was a slow quarter for the company as its revenue dropped 11.6% year on year, in line with analysts' estimates. This could mean that the current downcycle is deepening.

Marvell Technology's revenue growth has slowed over the last three quarters and its management team projects growth to turn negative next quarter. As such, the company is guiding for a 8.93% year-on-year revenue decline, but Wall Street thinks there will be a recovery next year. Analysts' estimates call for 6.05% growth over the next 12 months.

The pandemic fundamentally changed several consumer habits. There is a founder-led company that is massively benefiting from this shift. The business has grown astonishingly fast, with 40%+ free cash flow margins. Its fundamentals are undoubtedly best-in-class. Still, the total addressable market is so big that the company has room to grow many times in size. You can find it on our platform for free.

Product Demand & Outstanding Inventory

Days Inventory Outstanding (DIO) is an important metric for chipmakers, as it reflects a business' capital intensity and the cyclical nature of semiconductor supply and demand. In a tight supply environment, inventories tend to be stable, allowing chipmakers to exert pricing power. Steadily increasing DIO can be a warning sign that demand is weak, and if inventories continue to rise, the company may have to downsize production.

This quarter, Marvell Technology's DIO came in at 113, which is 22 days above its five-year average. These numbers suggest that despite the recent decrease, the company's inventory levels are higher than what we've seen in the past.

Key Takeaways from Marvell Technology's Q2 Results

With a market capitalization of $52.9 billion, a $423.4 million cash balance, and positive free cash flow over the last 12 months, we're confident that Marvell Technology has the resources needed to pursue a high-growth business strategy.

We were impressed by Marvell Technology's strong improvement in inventory levels. We were also glad that its EPS outperformed Wall Street's estimates. On the other hand, its free cash flow fell short of analysts' expectations and its gross and operating margins regrettably declined. Overall, this was a mixed quarter for Marvell Technology and the market was likely hoping for more. The company is down 2.72% on the results and currently trades at $55.72 per share.

Marvell Technology may have had a tough quarter, but does that actually create an opportunity to invest right now? When making that decision, it's important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it's free.

One way to find opportunities in the market is to watch for generational shifts in the economy. Almost every company is slowly finding itself becoming a technology company and facing cybersecurity risks and as a result, the demand for cloud-native cybersecurity is skyrocketing. This company is leading a massive technological shift in the industry and with revenue growth of 50% year on year and best-in-class SaaS metrics it should definitely be on your radar.

The author has no position in any of the stocks mentioned in this report.