Marvell Technology stock flashes red ahead of earnings: will it drop?

Marvell Technology NASDAQ:MRVL stock price is in a strong bull run this year, making it one of the top gainers in Wall Street. MRVL jumped from last year’s low of $47 to $196, with its market capitalization rising from $42 billion to $171 billion. Will this rally continue rising ahead of earnings?

Marvell Technology stock in focus ahead of earnings

The MRVL share price has continued its strong bull run this year, helped by the booming artificial intelligence (AI) boom that has pushed demand for its products to a record high. 

The soaring demand likely explains why NVIDIA recently decided to invest huge sums of money in the company. It also explains why the company decided to spend $3.5 billion acquiring Celestial AI, which it hopes will help it achieve an annual revenue of over $10 billion this year. It made $8.1 billion in the last financial year.

The main catalyst for Marvell Technology's stock price will be the upcoming earnings, which will provide more color on its business trajectory this year. Wall Street analysts believe that the company’s revenue will come in at $2.4 billion, up by 26% YoY. In addition to its own organic growth, this valuation metric will include its Celestial AI buyout. 

Analysts also expect that its earnings per share (EPS) will grow from 62 cents in the first quarter of last year to 79 cents today, a 27% increase. 

For the year, analysts expect that it will make $10.8 billion, followed by $14 billion next year. Marvell Technology tends to do better than what analysts expect in most periods. 

This growth is mostly because of its large partnerships with companies like Amazon, Microsoft, Alphabet, and Meta Platforms. These are large multi-year contracts, mostly about their ASIC chips. 

Valuation concerns remain

The upcoming earnings report comes as some investors are questioning its valuation metrics. Indeed, the current MRVL stock price of $196 is much higher than the consensus estimate of $143. That is a sign that Wall Street analysts believe that its stock has more downside risk to go. 

The stock has a forward price-to-earnings ratio of 98, much higher than the average S&P 500 Index multiple of 23. Also, the forward non-GAAP P/E ratio has jumped to 51, higher than the five-year average of 36. The same is happening with the forward PEG ratio, which stands at 1.33. 

On the positive side, the company has an encouraging rule-of-40 multiple. Its revenue growth of 42% added to its net profit margin of 34% gives it a rule-of-40 multiple of 76%.

MRVL stock price technical analysis

Marvell Technology stock chart | Source: TradingView

The daily chart reveals that the Marvell Technology stock price remained inside the narrow range of between $47 and $102 for months before making the current bullish breakout. That is a sign that it has now moved to the markup phase of the Wyckoff Theory, which is followed by the distribution and markdown.

The stock has also deviated substantially from its historical moving averages. For example, the stock is much higher than the 100-day moving average, which stands at $123. 

It has also become highly overbought, with the Relative Strength (RSI) being at 72. A closer look shows that it has formed a bearish divergence pattern as the RSI has continued falling. 

Therefore, the stock will likely have a bearish breakout in the near term. If this happens, it may drop to as low as $150. The risk of this thesis is that we are in the AI supercycle, meaning that the bull run may accelerate.