Marvell Technology Is Bullish on Data Centers. Why the Stock Is Falling.

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Infrastructure chip maker Marvell Technology shares fell in the extended session, even though the company beat earnings expectations on an adjusted basis and issued a bullish outlook for its data-center business.

Shares of Marvell dropped 4.4% in after-hours trading.

Marvell reported a fiscal second-quarter net loss of $276.4 million, which amounts to 34 cents a share, compared with $157.9 million, or 24 cents a share, in the year-ago period. Revenue rose 48% to $1.08 billion.

Adjusted for the amortization of intangible assets, stock compensation, and other items, earnings were 34 cents a share. Analysts had expected adjusted earnings of 31 cents a share on revenue of $1.07 billion.

In an interview, CEO Matt Murphy pointed to the companys data-center segment as one of the most promising areas of growth. The segment now accounts for 40% of overall revenue, and Murphy told Barrons that he expects revenue to grow sequentially in the single digits from second-quarter revenue of $434 million.

We have the most exposure to data center, as a percentage of our revenue, than any other semiconductor company in the world, Murphy said. Its the biggest part of our company already, and its got legs to keep going.

In part, Murphy credits hyperscale data-center builderstech companies that need huge data centers to run their various apps and services in the cloud. Companies such as Amazon.com (AMZN), Microsoft (MSFT), Facebook (FB), Alphabet, and others need enormous amounts of computing power to run the software used by billions of people.

Every one of the data platform companies is pouring tons of money into equipment, and they are huge purchases, Murphy said. You have to optimize the hardware and the chips underneath it. And thats where we come in.

Marvell said it expects fiscal third-quarter adjusted earnings of roughly 38 cents (plus or minus 3 cents), and revenue of $1.12 billion (plus or minus 3%). Analysts had expected third-quarter non-GAAP earnings of 37 cents! a share on revenue of $1.13 billion.

Murphy said the cloud data center and 5G markets will help the companys third-quarter growth. The companys 5G revenue is projected to see a significant step up in the fourth quarter, he said, because several of the large wireless base-station businesses are ramping up production of units that include Marvell chips. Countries outside of China are now too building more 5G infrastructure, he said.

Amid a global shortage for semiconductors, investors have typically expected chip companies to handily beat estimates, and issue bullish guidance for the coming quarter. With demand outstripping supply, semiconductor makers can theoretically sell nearly every chip they can produce.

Murphy said that demand continues to exceed supply across all of the companys business segments. Every one of them is carrying some level of delinquency, he said.

Marvell also said that beginning with the second quarter, it planned to report its segmented revenue based on end market versus the customer product as it had previously disclosed. End markets include data center, enterprise networking, and carrier infrastructure, among others. The company said it will host an analyst day in October where executives will lay out its future plans.

Earlier this month, Marvell said it plans to acquire Innovium, a networking chip startup, for $1.1 billion. The deal will give the company access to a market of $2 billion for Ethernet switch chips inside data centers. Marvell bought Inphi, an optical component maker, last year for $10 billion.

Marvell stock closed Thursday with an advance of 0.1% to $63.24. Shares gained 33% this year, as the PHLX Semiconductor index, or Sox, rose 21%.

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