Key Points
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Marvell is going to acquire Lumentum for an implied enterprise value of $115 billion.
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It’s an all-stock deal that positions Marvell for additional growth opportunities in the AI infrastructure build-out.
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It happens at a time when the excitement around AI stocks has been cooling significantly.
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Marvell Technology (NASDAQ:MRVL) just announced a huge move. It’s acquiring Lumentum Holdings (NASDAQ:LITE) in a deal that values the tech company at a whopping $115 billion, based on implied enterprise value. It’s a move that will expand the company’s growth opportunities in artificial intelligence (AI) and bolster its total addressable market to $550 billion.
But the tech stock is down sharply on the news, hitting levels it hasn’t seen in several months. Why does the market not appear to like this move, and could buying Marvell’s stock on the dip be a good idea right now?
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The deal is a big bet on AI
Marvell announced on Monday that it would acquire Lumentum in an all-stock transaction valued at $115 billion. Management sees this as a way to create a “category leader in AI connectivity,” with Lumentum making optical products essential to the AI infrastructure build-out. By combining chips with optical connections, Marvell CEO Matt Murphy plans to build solutions “that are highly sticky.”
The market, however, may not be thrilled with the massive price tag for Lumentum, nor with the all-stock offering, which will be dilutive to existing shareholders. It comes down to whether the net effect will prove to be a positive one for Marvell and lead to more earnings growth as a result of this combination, but based on the stock’s performance, the market doesn’t appear convinced of the payoff.
It also comes at a time when tech stocks have come under pressure of late. Marvell’s pursuit of a significant purchase such as this may simply have come at a bad time. However, it’s not unusual for shares of an acquiring company to fall in value when news of an acquisition comes out, as investors often question the value they are getting back in the deal, and whether it will pay off in the end.
Why Marvell’s stock could still go lower
Marvell is making a big bet on the future demand for AI infrastructure, and the market may be unsure about that right now. With interest rates on the rise again, tech spending may slow in the near future.
Meanwhile, with Marvell’s stock trading at around 60 times its trailing earnings, it was already a high-priced investment before this latest announcement. For investors who may have been thinking twice about the AI stock, Marvell may have given those on the fence a stronger reason to sell rather than buy, and this may just be the beginning of a bigger decline to come.
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David Jagielski, CPA has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Lumentum and Marvell Technology. The Motley Fool has a disclosure policy.
