Marvell Technology, Inc. (MRVL.US) saw a significant decline after its earnings report: exceeding expectations was not enough, as Wall Street is dissatisfied with the slow "accounting" of the large orders from Alphabet Inc. Class C (GOOGL.US).

Despite Marvell Technology, Inc. (MRVL.US) latest financial report and future revenue guidance appearing to exceed market expectations, its stock price plummeted in pre-market trading on Friday. The sell-off was not triggered by a weakening of the fundamentals but rather by Wall Street's reassessment of the timing of revenue realization from the significant orders for custom chips from Alphabet Inc. Class C (GOOGL.US) many institutions believe this substantial positive news has already been fully reflected in the prior price increases, and management emphasized that the significant impact of this collaboration will not be seen until fiscal year 2029 and beyond, a timeline that is much later than the market's previous expectations, leaving investors, who had hoped for quicker performance boosts from the deal, feeling disappointed. Looking purely at the data, Marvell Technology, Inc.'s revenue for the second fiscal quarter was $2.5 billion, meeting market expectations. The company provided third fiscal quarter guidance for revenue of $3.15 billion, plus or minus 5%, with adjusted earnings per share of $1.10, plus or minus $0.05; analysts had previously expected revenue of $3.04 billion and adjusted earnings per share of $1.08. This means the short-term guidance is slightly above market consensus. In addition, the company raised its long-term revenue targets: driven by the continued growth of its data center business, revenue for fiscal year 2027 was raised from approximately $11.5 billion to about $12 billion, indicating a year-on-year growth of approximately 45%; revenue for fiscal year 2028 was raised from about $16.5 billion to around $18 billion. However, these upward revisions did not satisfy investors. Analysts from Goldman Sachs Group, Inc. pointed out that the market's expectations had already been significantly elevated ahead of this quarter's earnings report, partly due to strong spending from major clients and the collaboration deal with Alphabet Inc. Class C announced last week. Morgan Stanley believes that the revenue contribution from Alphabet Inc. Class C has mostly been reflected in the prior guidance, therefore, mechanistically, Marvell Technology, Inc.'s guidance, while raised, is generally consistent with the long-term growth trajectory previously provided by management. In other words, this represents a classic case of buy the expectation, sell the fact. Marvell Technology, Inc.'s stock price has nearly tripled this year, and the market has already accounted for the large order from Alphabet Inc. Class C in its valuation; the earnings report merely confirmed the existing logic without providing enough new catalysts. Alphabet Inc. Class C Deal: Tempting Long-Term Story, Lack of Short-Term Details Last week, Marvell Technology, Inc. announced a custom chip collaboration agreement with Alphabet Inc. Class C. According to the disclosure, this agreement could bring in up to $120 billion in revenue by fiscal year 2033 and could make Alphabet Inc. Class C one of Marvell Technology, Inc.'s largest shareholders. This should have been excellent news, but investors quickly shifted their focus to the cadence of revenue recognition. Matt Murphy, CEO of Marvell Technology, Inc., explained on the conference call that the custom chip revenue target until fiscal year 2028 already includes a portion of the revenue related to Alphabet Inc. Class C, and the "significant impact" of this deal will not truly materialize until fiscal year 2029 and beyond. This statement directly weakened the short-term imaginative space. Jefferies analyst Blayne Curtis wrote in a report that Marvell Technology, Inc.'s performance was only moderately better than expected and did not disrupt any long-term logic, but some disappointment also exists. He noted, It is disappointing that the revenue related to Alphabet Inc. Class C has already been included in the previous AI growth guidance. However, Curtis believes there may be upside to the $10 billion revenue target for 2028, with larger incremental opportunities concentrated in fiscal year 2029 and beyond. He maintains a Buy rating and a target price of $325. RBC Capital Markets analyst Srini Pajjuri also believes the performance was in line with his expectations but that the market was disappointed by the lack of detailed disclosure regarding the Alphabet Inc. Class C agreement. He stated, The custom chip business is progressing well, driven by Amazon.com, Inc. (AMZN.US) AWS and Microsoft Corporation (MSFT.US) XPU projects. However, there is limited detail on the revenue from the Alphabet Inc. Class C agreement, which was postponed until Analyst Day, which likely impacted the stock price. However, Pajjuri is not concerned, as he anticipates that the Alphabet Inc. Class C project will ramp up in fiscal year 2029, significantly increasing the current custom chip revenue target of over $10 billion. He reiterated his Outperform rating and target price of $360. The Cantor analyst C.J. Muse team noted that while Marvell Technology, Inc.'s earnings report was moderately above expectations and guidance was raised, market expectations had already been elevated following the announcement of the Alphabet Inc. Class C collaboration. Cantor maintains a Neutral rating but believes that the post-earnings sell-off and the potential for more details on the Alphabet Inc. Class C deal to be disclosed at the October Investor Day could create a rebound opportunity in the short term. Despite the stock price decline, most institutions have not changed their long-term bullish stance. According to data from LSEG, at least five brokerages raised their target prices for Marvell Technology, Inc. after the earnings report, with a median target price of $275, indicating approximately 13.8% upside from Thursday's closing price. Melius Research stated in its report that, although the quarterly performance and short-term guidance are not exciting relative to expectations, the Alphabet Inc. Class C deal, the outlook related to Microsoft Corporation, and the upside potential in the AI connectivity business suggest some very large numbers, making it look feasible to achieve a $20 earnings per share capability before the end of this decade. Citigroup analyst Atif Malik is also impressed by Marvell Technology, Inc.'s projected sales growth trajectory over the next three years, especially the data center revenue, which is expected to grow 60% in fiscal year 2027 and more than 60% in fiscal year 2028. In terms of valuation, Marvell Technology, Inc. has a forward P/E ratio of about 58 times for the next 12 months, while its competitor Broadcom Inc. (AVGO.US) is about 32 times. The high valuation means any deviation in expectations could amplify stock price volatility. Morgan Stanley also pointed out that Marvell Technology, Inc.'s business model differs from many peers: They tend to provide very optimistic long-term forecasts and then execute on those forecasts, while other companies rely more on consistently exceeding expectations and raising guidance to drive stock prices. This style makes Investor Day a critical validation point. Marvell Technology, Inc. plans to hold an Investor Day in early October, at which more details about the Alphabet Inc. Class C deal will be provided, including the cadence of revenue ramp-up, margin impacts, capacity arrangements for custom chips, and synergies with other hyper-scale customers.