Marvell’s Custom Chip Strategy: Navigating Growth Opportunities and Margin Challenges in AI Market

Marvell Technology recently disclosed its foray into the lucrative arena of custom chip development, particularly tailored for large U.S.-based cloud computing giants to bolster their artificial intelligence (AI) capabilities. While this announcement heralds significant growth potential, Marvell executives cautioned investors about the lower profit margins associated with its custom chip unit, leading to a 2.7% dip in share prices following the investor presentation.

The company projects robust growth in the AI chip business, with sales expected to reach $2.5 billion by fiscal 2026. Marvell’s strategic collaboration with tech behemoths like Amazon.com involves designing bespoke chips tailored to their cloud computing operations, positioning Marvell in direct competition with industry heavyweights such as Alphabet’s supplier, Broadcom, which anticipates $10 billion in AI chip sales this year.

During the investor presentation, Marvell CEO Matt Murphy provided insights into the company’s custom chip endeavors, revealing ongoing production of custom AI chips for prominent cloud computing clients. Additionally, Marvell is set to introduce a central processor, leveraging Arm Holdings’ technology, for another client, with both ventures slated to generate revenue this year. Murphy also unveiled Marvell’s plans to develop an AI chip for a third client, slated for production in 2026, signaling the company’s long-term commitment to AI-driven innovation.

However, Murphy acknowledged the trade-off between the profitability of custom chips versus Marvell’s off-the-shelf offerings, known as “merchant” chips. While custom chips yield lower gross margins, Murphy assured investors that operating margins would remain comparable over time, aligning with Marvell’s overarching profitability objectives. This disclosure underscores Marvell’s strategic balancing act between pursuing high-growth custom chip opportunities and maintaining overall profitability.

The revelation of lower gross margins in Marvell’s custom chip business underscores investor scrutiny over the unit’s financial performance, particularly in comparison to industry leader Nvidia. Broadcom, Marvell’s primary competitor in this space, has previously asserted that its custom chip margins would align with its corporate average, highlighting the competitive dynamics within the AI chip market.

Kinngai Chan of Summit Insights emphasized the significance of Marvell’s custom AI chip business as a key growth driver, albeit with lower gross margins. However, Chan noted that Marvell remains steadfast in achieving its operating margin targets by leveraging the anticipated revenue growth to offset the impact of lower margins in the custom chip segment.

In summary, Marvell Technology’s venture into custom chip development for AI applications presents both opportunities and challenges. While the company anticipates substantial revenue growth from this segment, the lower profit margins necessitate a strategic focus on optimizing operational efficiencies to maintain overall profitability. As Marvell navigates this dynamic landscape, investors remain vigilant about the company’s ability to capitalize on burgeoning AI opportunities while effectively managing margin pressures in its custom chip business.