MRVL “Compelling” Risk-Reward: Morningstar’s Bull Thesis in Earnings, AI Buildout

We're back on Morning Trade Live and looking at Marvell's one year chart. Were losing some steam today, but we were up quite significantlysterday oe up guidance at its investor day. It was one of the top performers on the S&P 500. But we came off the highs of the summer. We're climbing back once again right now as you c Let's go inside out on this company and get some takeaways from its Investor Day. Joining us now is William Kerwin, senior equity analyst atningstar. Good morning William. Thank you so much for your time. What were your biggest takea from some of this bullish commentary we got yesterday? Well good morning Sam. And it was certainly very ir valuation up to $360 a share up from 300 previously. And we still think there's a compel risk reward trade off here for investors at these levels especially being down a bit this morning as you said. But really the news was this guidance. Now we ha been expecting pretty immense growth over the next three and over the next five yor Marvell. But simply put, the guidance that management unvei yesterday blew our model coming think it's important to note that we see management's targets as very credible. T thes of management putting out what lo like extremely bullish targets at first and then achieving against those, and that'sated that really impressive one year stock chart that you showed just now for sure. So you believe what they've put out there now is well withinch. We think it is. But the k risk in talking about any of these AI infrastructure stocks is what broader AI spending environment look like now? We feel there are very good data points and momentum towards this accelerating demand through 2028. And the question then becomes, what happens therea And do we get this durable spending growth through 2030 and potentiallyd? Management was very bullish that the economics that these cloud hyperscalers are getting a positive ROI on AI, and that spending can continue. And we tend to agree. But certainly we risk to achieving these numbers. this one as far as investorsit rewarding this stock, has been theisibility that they're able to give. I mean, is that they're able to look into the future? So far in what has typically been a more sort of cyclicaless, that they are sort of flying in the face of that, you know, sort of, I s,, for a company like that. Well, we think it's a paradigm shiftsu have customers up and down the supply chain that in response to supply constraints, in response to incredible demand, we are seeing these multi year far out spe commitments trying to lock down deals, lock down supply. And so we don't really think this is necessarily an idiosyncratic dynamic for Marvell, but more so indicative of just how much demand and just tight supply there is in the AI infrastructure supply chain. Right. And why does it matter for Mar mean, what does it do for the broader AI industry? Because it was interesting on a day like obviously the stock being rewarded, semiconductors as aolh space. So they have a lot of shots on goal, as they will call them. And really this spreads across what we would call compute and connectivity. Now opt has been a pretty hot trend in the market this year. Marvell is an optics leader. It makes essentially processing chips that convert optical signals into electrical signals. This has a huge place in AI networks, effectively how GPUs connect to each other in an AIa center. But Marvell also has this business of creating these custom sors for AI, which we call Xpu. It's a competitor to Broa to the likes of MediaTek here, and really a whole lot of auxiliary networking connectivity, what we would call it. And so there are a huge amount of buckets that the firm is tyingo within AI infrastructure. It's broadly exposed in the datacente is that it's firing on all cylinders and all of these buckets are growing. But I would put the two largest ones is really that chen that optics connectivity. Okay. Yeah. I mean, obvio more diversified as well. But I mean, a year to date climb of over 200% is I hear what you're saying about the spe but is the bar just getting higher and higher for these stocks? Does it get moreifficult? I think so, but when you look atee promising, the they are clearing even a very high bar. t annualized growth over the next five years, upwards of 50%, 60% annualized growth. We're talking about going from 8 billion in sales last year to in calendar 2030, a midpoint of 80 billion in sales.en X increase over five years. So I agree with you that I think the bar is g a lot higher for these stocks to merit these look at the guidance thaty Marvell put out, I think if they hit that, it by ears that bar. And how much does this all hinge on the succe of the financials around companies like OpenAI and anthropic? An enormous amount. And we ain, we see that as the primary risk here. Now, I think it's you can look two sides of this coin, right. And you look at the public cloud providers. We have strong metrics there. We have improving profita of th cloud businesses as they deploy AI. And you can track their free cash flow. And as that grows, see a positive return on AIing for the frontier labs like OpenAI and anthropic. It's a little bit murkier. Yes. We got a leaked report of Anthropic's S-1. It appears thatthese companies are losing money, but really what matters is theajectf they're losing money today, can they creat a ramp towards profitability in the next five years? And we thinkey can do so, that all of this spending can remain supported, as long as th confidence that that happens eventually. But we think they're the biggest risks right now to the spending. Because if you see even o these large AI model deployers fall off or cut its spending, it can have a big ripple effect through the supply chain. Yeah, it certainlls like a dominoes effect if that is the case. William, thank you so much fortt we got from that Investor Day, particuliven what we saw as far as the reaction in the market. William Cohen, their seniorquity analyst over at Morningstar. Let's trade it now with Tom white host of Fast Market. Good morning Tom. Walk us through an example. Trade on this one. Yeah. Sam with the upgrades price target hikes across the board, the CEO raising those fiscal year 2028 ley about $2 billion. them, reaching $400 billion by So yeah, projections after their investor day pretty robust here. And that's why you saw the stock pop yesterday pulling back here a little bit today, probably with the overall market. So I looked at a high priced stock $280. Right. So you know if you want to take a directional bias who's in the option market. Creatinge leverage while giving yourself some duration might be the way to look at this. My e, I just looked at a bullish trade. If you're, if you think the stock's going to conto move higher, this strategy takes advantage of it gives you t out to the November monthly cycle. So giving myself 44 days in this example trade where I'm going to buy the at the money 280 strike call. And then against it I'm going to sell the 330 strik call. So a bullish $50 wide call vertical e. You're going to pay roughly about a $15.5 debit for it.re's your risk $1,550 per spread on this bullish call vertical. That can expand to $50 if we getve the 330 level. If you pay 1550, it takes your break e to 295 50 to the upside. That's about 5.5% above the current share price. So you're giving yourself 44 days in tposition. % move to get above that break You have that flexibility. As far as trade management, I don't need to wait4 days. If I start seeing this stock move above two, 95, 303 ten, and it's this vertical starts to expand in price, can close it ahead of time if the market's open. So it gives you that flexibility as far as trade management goes. Now I bought the 280 call. That's at the mIt's got the higher delta. That's a bullish portion. When I buy the 280 call. And sell the 330 call against it to offset some of my costs on this bullish pos It caps some of my gains. Right. I still have nearly $3,50 in potential profitability if it gets above 330. But why did I pick tha strike? Well, the option market for the November series is prici a plus or -$50 move in either direction. So if you get that move with the option market's pricing in, it aligns with that 330 strike. So pretty good risk reward set up here. The key is you still need a mov the upside. You do have risk on this one. If the stock consolidates here, goes lower or even goes higher but doesn't get above that. 295 could be a loser on here, but this is directionally bullish trade for upside exposure certainly is within reach as far as a lot of these analysts are concerned. When ye a look at some of these price target hikes as you mentioned TD Cowen saying aggressive but reasonable. So pulling back