Why Marvell will be at forefront of AI demand from 5G providers

As part of the latest installment of Yahoo Finance's Good Buy or Goodbye, Tematica Research Chief Investment Officer Chris Versace joins Julie Hyman to give his takes on chip stock Marvell Technology (MRVL) on AI momentums and retailer Dillard's (DDS) as the latter contends with slowing consumer spending in department stores.

Marvell is Versace's Good Buy on its exposure to telecom networks whose 5G networks will be pushed to adopt artificial intelligence to keep up increasing user activity.

"So as this virtuous circle of data just explodes, not just because of ongoing 5G adoption, not just because of other applications that are coming, but really in the near-term, this explosion due to AI, network spending is going to have to catch up," Versace explains. "In the near term, what are we going to see? Network capacity levels will continue to rise..."

Versace picks Dillard's as his Goodbye, citing declines in department store foot traffic as consumers become more selective about where they shop.

Catch more of Good Buy or Goodbye, or watch this full episode of Yahoo Finance Live here.

Editor's note: This article was written by Luke Carberry Mogan.

Video Transcript

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JULIE HYMAN: It's a big, noisy universe of stocks out there. Welcome to "Good Buy or Goodbye," our goal to help cut through that noise to navigate the best moves for your portfolio. Today we're focusing on what companies investors are currently betting big on with predicted long runways for growth and where there is not. I'm here with Chris Versace, Thematic Research Chief Investment Officer. And first of all, welcome to you. Thanks for being here.

CHRIS VERSACE: Happy to be here.

JULIE HYMAN: See, I'm blaming the time change on everything-- everything that goes wrong today. Let's talk about your goodbye stock, and that is Marvell Technology. Now, the stock did have a pullback last week after its earnings, but let's get to why you like it here. AI and data center demand, first reason.

CHRIS VERSACE: Well, let's start off by saying that there's a lot of different chip stocks out there. We tend to think about Intel. We tend to think about Qualcomm. But Marvell is a little different because its chips really go into the infrastructure that supports all the connectivity that we have. So when we think about the rampant spending on AI, or we hear from Google, Meta, Amazon, how they're spending on data centers, all that requires chips. And we know this from NVIDIA, who had stellar, stellar guidance.

But guess what? Marvell did report last week. And their data center business was up huge, like Donald Trump huge type numbers, OK? There was some other businesses that didn't perform as well. But I think that as a result of the continued AI wave and what we're going to see, as embedded AI comes to devices, smartphones, PCs, and really turbocharges the amount of data that we're consuming and creating, you're going to see a rebound in the network and carrier spending. And that's really the second point.

JULIE HYMAN: Interesting. In the places that had lagged--

CHRIS VERSACE: Correct.

JULIE HYMAN: --in that earnings report last week. OK, so talk me through that.

CHRIS VERSACE: So, if we think about how our data gets moved around, it's not simply-- there it is, right? It has to traverse through a network, whether it's the wireless network, the fiber networks that we have. And there's all sorts of enterprise related networking as well.

So, as this virtuous circle of data just explodes, not just because of ongoing 5G adoption, not just because of other applications that are coming, but really, in the near term, this explosion due to AI, network spending is going to have to catch up.

In the near term, what are we going to see? Network capacity levels will continue to rise, as companies like AT&T, Comcast, Verizon, try to hold off spending. But at some point, there's going to be a breakthrough wave where they have to upgrade their networks because you and I are not going to be happy with subpar service.

JULIE HYMAN: Right, and that's interesting because it's not only predicated on the AI story, but on a bigger data story. And then, finally, the stock had had a monster run going into the earnings and then saw that pullback.

CHRIS VERSACE: Yes, so like a lot of names that touch the AI space, the stock's had a significant run, not just so far in 2024, but really since the end of October. Priced to perfection, right? So, not only do they have to deliver a great quarter, the guidance had to be stellar across the board. And as we saw, Marvell did disappoint. But that's actually opportunity for folks that have missed out.

So, we're seeing that kind of pullback now. They did one of the earnings playbook moves, I would say, which is, we've seen companies that have delivered softer than expected outlooks either hike a dividend if they could or announce a big buyback. They announced a $3 billion buyback. And I think they're going to use that to support the stock.

JULIE HYMAN: Oh, interesting. OK, so we always talk about the risk potentially here. And you've got two-- time and market risk. What do you mean by that?

CHRIS VERSACE: Well, time means that we just might be a little early, right? I think ultimately, this is going to happen. The timing that I'm thinking about is we start to see the first wave of these new AI-enabled devices happen in the second half of the year ahead of the holiday shopping season, fostering this big upgrade cycle.

I say this because, well, take a look at what we saw at CES 24 and 24 Mobile World Congress. And let's think about what Dell announced, just one, two weeks ago, about AI-enabled laptops coming to market. It's going to happen. And then the market risk is just the market. If we do see the market pull back in a meaningful way, Marvell is going to come down.

JULIE HYMAN: Right, and we've seen that with tech stocks specifically. Do you hold Marvell, by the way?

CHRIS VERSACE: Marvell is one of the largest holdings in the AEP portfolio that I manage for the Street.

JULIE HYMAN: All right, good to know. And then if-- people are spending money on mobile phones and networking and things, something maybe they're not spending as much on is in a department store like Dillard's, which is the stock--

CHRIS VERSACE: Or Macy's.

JULIE HYMAN: --that you're saying to avoid. Macy's, which we were talking about earlier. The stock's actually had a little bit of a rebound here. So, why do you think that Dillard's is not going to benefit?

CHRIS VERSACE: Well, a couple of reasons. One, if you take a look at a lot of the data that we see-- and I'm sure others see as well-- the consumer still remains very selective. They're not just willy nilly spending. And I think that if we take a look at the consumer debt levels because we just got the January consumer credit report, wow, they really took on a lot more debt. So they're going to be even more selective going forward.

So, I just don't see folks flocking to department stores anymore. And the data shows that, right? So when we look at the next data point, in the last quarter, the holiday shopping season, department store retail sales over the trailing three months, fell 4.7%. People are not going there. Worse, when Dillard's reported its quarter, they were down 5%. So they're losing share.

JULIE HYMAN: Right, and they're losing share, too. Let's get to the next one here, Amazon and other online retailers.

CHRIS VERSACE: 100%. There was a stat that I saw that Amazon is 34 and 1/2% of all US online retail sales. And if you go outside of online retail sales, they are around 15% to 16% of total apparel sales. That's going to hit the department stores square in the gut. And then there's Costco, which, believe it or not, this number is just a little old. There are about $9, 10 billion in apparel. So, the competitive forces are circling.

JULIE HYMAN: Interesting, and more value, probably, compared with a Dillard's. What would be the risk, though, to the upside here, or is that the economy ends up better?

CHRIS VERSACE: Yeah, it's simply that the consumer is way stronger than we expect. Job growth surprised to the upside last week. Wage growth still a little bit better for job changers if you look at the ADP data. So to the extent that real wage growth accelerates, well, people have more money, they'd be able to spend more. I still don't think they're going to do it at Dillard's.

JULIE HYMAN: Fair enough, and do you have any position in Dillard's, by the way? OK, so let's summarize your case here, and it really has to do with where people are spending their money. You're saying buy Marvell due to the company's strong financials and the growing demand for AI, but just for networking, more broadly. On the other side, you say avoid Dillard's due to growing competition in the retail space and a more choiceful consumer. I believe that's how Walmart executives have put it.