MRVL Drops 8% on Margin Guide Despite Strong AI Growth

Marvell Technology reported fiscal Q2 2027 results that beat expectations on almost every front. Revenue hit a record $2.739 billion, up 37% year over year, and data center revenue surged 46% to $2.17 billion, now making up 79% of total sales. Adjusted EPS came in at $0.94, and operating cash flow was strong at $605.5 million.

Management also raised its revenue outlook for fiscal 2027 to about $12 billion, up from $11.5 billion, and for fiscal 2028 to $18 billion, up from $16.5 billion. CEO Matt Murphy highlighted that AI-related bookings remain exceptionally robust, with growth expected to accelerate through the rest of the year.

Despite these positives, the stock fell about 8% in after-hours trading. The culprit: non-GAAP gross margin, which came in at 58.9%, flat sequentially but below the 59.4% reported a year ago. More concerning, management guided Q3 gross margin to a range of 57.5% to 58.5%, indicating further compression.

The margin decline is attributed to the accelerating custom chip business, which carries lower margins than Marvell's other products. CFO Dan Durn noted that revenue levels and product mix are key determinants, and the company expects margins to stay in that range in Q4 as well.

In short, the same growth engine—custom AI chips—is pressuring profitability, and investors are repricing the cost of winning those contracts.

Marvell's results highlight a critical tension in the AI chip market: rapid revenue growth often comes at the expense of gross margins. As custom chip designs scale, they dilute overall profitability, which can spook investors who expect both growth and margin expansion.

For Marvell, each point of gross margin lost on its projected $3.15 billion quarterly revenue equates to about $30 million in quarterly gross profit. The guidance implies giving up about one point, which is a significant hit to the bottom line.

However, the demand for custom AI chips is undeniable. Marvell's raised guidance for fiscal 2028 suggests management sees this as a long-term growth driver. The company plans to detail its strategy at an investor day on Oct. 6, which could provide more clarity on the custom chip opportunity's size and profitability.

Investors are now weighing whether the margin compression is a temporary cost of scaling or a structural shift. If custom chips become a larger part of the mix, margins may stay lower, but the absolute profit could still grow substantially given the revenue surge.

Competitively, Marvell is winning key AI contracts, which positions it well against rivals like Broadcom. The trade-off seems acceptable to some analysts, who prefer owning the supplier that wins AI designs over one that maintains margins but loses market share.

Valuation remains a concern, with shares trading at about 35 times forward earnings even after the drop. The stock has more than tripled from its 52-week low, so investors had priced in perfection. The margin guide is a reality check.