What Is One of the Best Artificial Intelligence (AI) Stocks to Buy Now?
News Summary
Despite the cooling temperatures, investor enthusiasm for Artificial Intelligence (AI) stocks remains red-hot, leading to high valuations for many. The article highlights AI specialist Marvell Technology (MRVL) as a great bargain opportunity right now. Marvell's stock has recently plummeted due to disappointing analyst expectations following its Q2 2026 financial results. While the company reported a 69% year-over-year increase in data center revenue to $1.49 billion, management projected flat quarter-over-quarter data center revenue for Q3. However, management remains optimistic, noting a "substantially stronger" Q4 for its custom business, which designs custom semiconductors for leading hyperscalers like Amazon's AWS and Microsoft's Azure. Marvell estimates its total addressable market (TAM) at $94 billion, significantly higher than its fiscal 2025 revenue of $5.8 billion. Trading at 23.4 times operating cash flow, a discount to its five-year average of 33.8 times, Marvell stock is presented as an attractive opportunity for patient investors willing to endure some near-term volatility.
Background
The rapid advancement of Artificial Intelligence (AI) technology, particularly generative AI, is driving a new growth cycle in the semiconductor industry. Data centers serve as the core infrastructure for AI computing, with sustained strong demand for high-performance custom chips. Hyperscale cloud service providers, such as Amazon Web Services (AWS) and Microsoft Azure, are key drivers of the custom AI chip market. They require specially optimized hardware to handle increasingly complex AI workloads, leading chip design companies to establish deep partnerships and offer customized solutions. Marvell Technology, as a leading semiconductor company, has long held a position in data storage, networking, and custom chips. The company's focus in the AI era on providing custom semiconductors for data centers and hyperscale clients positions it as a critical player in the AI supply chain. Recently, Wall Street has shown sensitivity to short-term performance fluctuations in tech stocks, especially AI shares; even with strong long-term prospects, weak short-term guidance can lead to stock pullbacks.
In-Depth AI Insights
1. Is Wall Street's short-term focus on Marvell's sequential growth obscuring the long-term strategic value of its custom chip business? - The Street's quarterly obsession often overlooks the inherent cyclicality and project-based nature of the semiconductor industry, particularly in custom chips. Hyperscaler demand can be lumpy, leading to revenue fluctuations that don't necessarily reflect long-term partnerships or technological leadership. - Marvell's custom collaborations with top hyperscalers mean its products are deeply embedded within client ecosystems, creating high switching costs and long-term revenue streams. This deep integration is strategically more defensive than selling standardized products, suggesting robust future orders despite flat short-term guidance. - Management's mention of a "substantially stronger" Q4 for custom business indicates its custom chip pipeline is progressing as planned, with delivery timing differences rather than demand contraction. Investors should focus on Marvell's growing strategic position in AI infrastructure, not just a single quarter's revenue curve. 2. What opportunities and risks does Marvell's custom semiconductor model for hyperscalers face amid the escalating US-China tech competition under the Trump administration? - Opportunities: The Trump administration's "America First" and technology self-reliance policies could push U.S. and allied hyperscale companies to prefer partnerships with U.S. firms like Marvell, ensuring supply chain security and technological control. Restrictions on Chinese AI chips might also indirectly expand market share for non-Chinese suppliers. - Risks: The fragmentation of global semiconductor supply chains and geopolitical tensions could increase the cost and complexity for Marvell to source specific raw materials or manufacturing services. If US-China tech decoupling intensifies, it could impact Marvell's global customer base and introduce operational uncertainties. - The key challenge for Marvell is to maintain technological leadership while effectively managing global supply chain risks and demonstrating flexibility amidst policy uncertainties to meet its global clients' customized needs. 3. What is the appeal of valuing Marvell based on operating cash flow, and does this signal a shift in valuation logic within the AI chip sector? - Valuing a capital-intensive tech company with uncertain growth prospects by operating cash flow (OCF) rather than traditional P/E ratios can provide a more accurate reflection of its true profitability and financial health. Marvell's discount relative to its historical OCF multiple suggests its intrinsic value may be underestimated by the market. - Given the massive R&D and capital expenditures in the AI chip industry, high-growth phases may be accompanied by lower or negative profit margins. Stable OCF indicates a company's ability to self-fund, supporting future expansion and technological iteration, offering a stronger margin of safety for investors. - This could signal a maturing of market investment in the AI sector: shifting from purely growth-expectation driven to a greater emphasis on a company's actual cash-generating ability and long-term sustainability. For companies with strong technological moats and stable customer bases, OCF valuation provides a more robust investment rationale.