MRVL is overvalued; fair value $207 vs price $266 implies 22% downside over 12-18 months; speaker does not own or buy.

many of these AI companies , including Broadcom and Marvell, are being drawn to, as they are poised to be among the biggest beneficiaries of the AI boom .

Meanwhile, Marvel operates in a similar category. They make some integrated circuits that are customized for specific applications. Marvell benefits most from connecting data centers, bringing all these components together to work as a large group to deliver value to customers.

Demand for Marvell's products and services is also rising significantly, prompting Nvidia CEO Jensen Huang to suggest that Marvell could become the next trillion-dollar semiconductor company.

Marvel's market capitalization is currently less than $ 300 billion, so that would be a huge increase from what it is today.

Meanwhile, Marvell is realizing a small fraction of this operating margin, about a third at 16.8%, but Marvell's operating margin is also improving.

As we have seen previously, Marvell is a much smaller-scale company, so it is reasonable to assume that as it grows, its profitability can expand further as it benefits from economies of scale.

Fortunately, Broadcom and Marvel operate on a relatively asset-light business model. They outsource most of their manufacturing processes. Meanwhile, Marvell's 12.61% is almost at the company's weighted average cost of capital, which is roughly half of what Broadcom achieves.

Marvell shares are trading at a forward price-to-earnings ratio of 39. This is more than double Broadcom's valuation of 18 according to the same metric. Now, I believe the reason Marvell is trading at a higher valuation is that its growth prospects in the coming years are greater than Broadcom's.

In the near term, since Marvell is starting from a lower base, its margins, revenues, return on invested capital, and cash flows are much lower than Broadcom, giving it much more room to grow.

For this reason, investors place a price premium on Marvell because its near-term growth prospects are better than Broadcom. But is it worth a premium of more than double Broadcom's price? I am not entirely convinced by this .

As for Marvell, I calculated a fair value of 207. The current market price is 266. Therefore, I calculated a 22% decline over the next 12 to 18 months for Marvell.

Comparing Marvell and Broadcom, Broadcom has historically offered better business prospects , but looking ahead, Marvell offers better upswing potential.

I do not own Marvel shares. I am not interested in buying Marvell shares at any level close to these prices.