Here’s why the Marvell Technology stock may plunge despite S&P 500 news

Marvell Technology's stock price surged on June 8, rebounding sharply from last week's brutal sell-off. The rally came after the company was announced as one of the upcoming additions to the S&P 500 Index. However, despite today's gains, there is a risk that MRVL stock could be on the verge of another pullback in the near term.

Marvell Technology stock jumps ahead of S&P 500 Index inclusion

The MRVL stock price jumped after it was revealed as the next S&P 500 Index constituent. Historically, companies jump after such an announcement because of the prestigious nature of the index. Also, exchange-traded funds tracking the index will be forced to buy shares worth billions in the company.

However, there are risks that the stock will pull back in the coming weeks or months. First, history shows that companies that enter the index jump and then pare back the gains over time. A good example of this is DoorDash, which surged to $285 last year after its inclusion. It has now retreated by 45% to $155. 

Similarly, Coinbase stock jumped to $447 last year, and then retreated to $162 today. The Trade Desk stock has plunged from $91 to $19, while AppLovin stock fell from $745 to $570 today. These retreats normally happen as investors sell the news. 

Second, there are signs that the company has become highly overvalued. Its GAAP forward price-to-earnings ratio moved to 142, much higher than the technology sector median of 32. The forward non-GAAP rose to 65, also higher than the sector median of 25. These numbers are much higher than its historical average. 

Marvell’s proponents point to its strong revenue growth, with Jensen Huang predicting that it will be the next trillion-dollar company. Its most recent results showed that its net revenue rose by 28% in the first quarter to $2.4 billion. 

This revenue was partly driven by its acquisition of Celestial AI and XConn. In a statement, the CEO said:

“We are seeing exceptional AI-related bookings, and as a result, we are significantly raising Marvell’s revenue outlook for both fiscal 2027 and fiscal 2028 compared with the guidance we provided last quarter.”

The company’s valuation concerns are also seen in the analysts' estimates. While most of them have a bullish outlook, the consensus target of $218 is lower than $300. This is a sign that the stock has some more downside.

Technicals point to the MRVL stock price retreat

Marvell Technology stock chart | Source: TradingView

The daily chart shows that the Marvell Technology stock price has gone parabolic in the past few months. This surge happened after the stock remained inside a narrow range between the key support and resistance levels at $72.45 and $102 for months.

There are signs that the rally has become overextended. For one, it remains much higher than its historical averages. For example, the 50-day Exponential Moving Average stands at $181, much lower than the current $298. As such, there is a risk that it will go through a mean reversion. 

The other risk is that the stock formed a big gap on June 1 after Jensen Huang made the trillion-dollar announcement. In most cases, assets often fill the gap whenever such a big gap happens. If this happens, the stock may retreat to $200 in the coming days or weeks.