On Nov. 2, Marvell Technology (NASDAQ:MRVL) agreed to buy Lumentum Holdings (NASDAQ:LITE), a maker of lasers and optical transceivers, in an all-stock deal. The firms put Lumentum’s enterprise value (its stock market value plus debt, minus cash) at $115 billion, using both stocks’ Oct. 28 closing prices.
Marvell says the combination creates a category leader in artificial intelligence (AI) connectivity — the chips and optical parts that send data between AI processors.
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Broadcom (NASDAQ:AVGO) knows the business well. The chip designer sells custom AI accelerators, Ethernet switches, and optical components for AI data centers. But its stock dipped only about 1% on Nov. 2, while Marvell shares slid about 13%.
At roughly $335 as I write, Broadcom stock trades about 30% under its June 2 record close of $481.57. When I last wrote about the company on Oct. 28, with shares near $342, I said I’d consider buying a little at a time.
Does a bigger rival change that?
Image source: The Motley Fool.
Marvell is building a bigger rival
Marvell already designs custom AI chips, plus network switches and the electrical and optical interconnect chips that link AI systems together. Lumentum brings high-performance lasers and optical transceivers, along with its own compound semiconductor manufacturing.
Broadcom competes in most of those markets. It designs custom AI accelerators for six customers, including Alphabet’s Google and Anthropic. The chips are made for one customer’s AI work, as an alternative to general-purpose graphics processing units (GPUs).
Broadcom also sells Tomahawk Ethernet switches. On its fiscal third-quarter earnings call on Sept. 2, CEO Hock Tan said the company had just finished designing Tomahawk 7, which he called the industry’s first 200-terabit-per-second Ethernet switch.
And Broadcom makes lasers, too.
“[D]emand for lasers … is far surpassing supply out there in the industry,” Tan said on the call. He added that Broadcom holds “a fairly substantial share of this market.”
Put simply, Lumentum’s lasers sell into a market where buyers can’t currently get enough of them. Sure, shortages like this don’t tend to last. But I think it makes the deal more of a long-term threat to Broadcom than a short-term one. A bigger rival could matter more when supply catches up to demand and buyers start shopping harder on price.
