Should You Consider Buying Marvell Technology Stock After Its Earnings Drop?

When a company releases its latest earnings report, it can greatly affect its stock price. If a stock experiences a noticeable decline, it might present a compelling opportunity for investors to buy. However, it's essential to evaluate the underlying reasons for the drop to avoid purchasing a stock that may continue to lose value.

Recently, Marvell Technology (MRVL) reported its earnings, which led to a significant decline in its share price. Following the earnings announcement, the stock plummeted sharply. On one particular Monday, shares closed at $65.67, marking a 27% drop from just a few days prior. This decline wasn't solely due to the earnings report but also stemmed from ongoing concerns regarding tariffs and trade tensions. As the week unfolded, the stock had already experienced a decline of over 40% in the previous month.

This situation raises an important question: Does this steep drop make Marvell stock a worthwhile investment, or should investors steer clear of what might be the beginning of a more significant downturn?

Sales Growth Outpaces Expectations, But Guidance Fuels Doubt

Marvell's performance in its latest quarter was not entirely negative. The company recorded revenues of $1.82 billion for the period ending February 1, which represented a year-over-year increase of 27%. This was an acceleration compared to its previous growth rates.

Many of Marvell's gains can be attributed to the surge in demand for artificial intelligence (AI), as the company manufactures custom chips for various businesses. However, recent scrutiny of AI spending has emerged. For instance, the Chinese company DeepSeek introduced a chatbot boasting significantly lower development costs than OpenAI's ChatGPT, inciting questions about the necessity of current spending levels on AI.

As a result, showing strong earnings may not guarantee an uptick in stock price if investors are concerned about a potential slowdown in growth. This fear can lead to a sell-off.

Indeed, it was Marvell's projected guidance that raised alarms among investors. The company anticipates revenues of approximately $1.88 billion for the upcoming quarter—only slightly higher than the previous quarter's figures and falling short of the $2 billion that some analysts had forecasted.

The Stock Still Has Room to Fall

Marvell's recent sharp drop has brought its stock price to a level unseen in months. However, even after this steep decline, the stock would require an additional decrease of 19% to reach its 52-week low of $53.19. Currently, the stock is trading at a forward price-to-earnings (P/E) ratio of less than 24.

It is vital to note that forward P/E ratios depend on analyst projections and can fluctuate based on both the company's outlook and the broader economic environment. Presently, uncertainties surrounding tariffs and trade conflicts are significant factors, with many investors worrying about a potential recession. The average P/E ratio for stocks in the Technology Select Sector SPDR Fund stands at around 25. While Marvell's stock is priced slightly lower, the difference isn't substantial.

Despite reporting a profit of $200 million in the last quarter, Marvell has faced challenges regarding consistent profitability; over the past year, the company recorded a net loss of $885 million on revenues of $5.8 billion. The implications of escalating costs from trade wars could affect both profits and revenue streams, especially since China represents a crucial market for the company, and the U.S. has imposed additional tariffs on the country this year.

Is There Potential for a Turnaround?

Multiple challenges persist for Marvell and other AI-related stocks this year, particularly heightened valuations. Although the stock is now offered at a much more favorable price compared to earlier in the year, risks remain that conditions could worsen in the coming months, largely due to the ongoing trade tensions, particularly between the U.S. and China.

If you're prepared to be patient and accept some risk, now might be a good time to consider purchasing Marvell stock. The company has managed to scale operations effectively and has become profitable; although trade conflicts could hinder progress, it seems unlikely that they will pose long-term challenges, as government regulations can change significantly across different administrations.

While a substantial rebound may not be on the immediate horizon for Marvell—unless the threat of a trade war diminishes—long-term investors willing to hold on for several years may find this stock a reasonable addition to their portfolio.

investing, stocks, earnings