Marvell Technology Surges Again on AI News, With Heavy, Unusual Call Options Activity

Marvell Technology (MRVL) surged this week on news that Google will use Marvell to make its AI inference microchips. Heavy and unusual MRVL call options activity today shows investors are taking advantage of its rise.

MRVL is up again today at $155.51 and has risen over 76.6% this month from a recent trough of $87.81 on March 30. However, based on my recent price target analysis, it could have significantly more to go. 

Some investors agree and are selling huge volumes of out-of-the-money (OTM) calls, assuming MTVL will rise further. This can be seen in a Barchart report today.

Unusual MRVL Call Options Activity

The Barchart Unusual Stock Options Activity Report today shows that the top three unusual options trades are all related to out-of-the-money (OTM) MRVL call options.

One tranche has had over 104x the prior number of call contracts traded at the $180 option strike price expiring in about 3 months (86 days) on July 17.

Moreover, the other two unusual call option trades are 52x and 41x higher than normal for the Aug. 21 expiry period, at the $175 and $170 strike prices.

These strike prices are a 9.3% to 15.8% higher than today's price. Moreover, the premiums for the calls are very high.

In other words, buyers of these call options think MRVL stock has plenty of upside, especially as the premiums they paid for these calls raise the breakeven prices:

  $180 strike +14.06 midpoint premium = $194.06 breakeven, i.e., +24.8% over today's price;

  $175 + $19.00  = $194.00 breakeven, and

  $170 + $20.15 = $190.15 breakeven.

These call options buyers must be very bullish on MRVL stock. They see MRVL rising dramatically over the next three to four months. More on this below.

Needless to say, this provides short-sellers (likely covered call sellers) with attractive immediate yields:

  $14/$155.51 = 9.0% over 86 days, or about 3.0% per month

  $19/$155.51 = 12.2% over 121 days, or 3.05% p/mo

  $20.15/$155.51 = 12.96%, 121 days, or 3.23% p/mo

In addition, if MRVL rises to these strike prices, the covered call sellers make a capital gain, raising their potential total returns to:

 $180/$155.51 -1 = 15.75% capital gain + 9% yield = +24.75% total potential return over 3 months;

 The other potential returns for the 4-month call tranches are +15.58% and +22.28%, respectively.

Let's look at why these investors are so bullish on MRVL stock's upside.

Higher FCF Could Push Up MRVL Price Targets

I discussed Marvell Technology stock's valuation in a March 11 Barchart article and also in an April 6 Barchart article, “Marvell Technology Stock Surges on Nvidia Investment, Sparking Huge Unusual Options Trades.”

I showed how MRVL stock could be worth between $133 and $192 per share over the next two fiscal years, based on its strong free cash flow (FCF) and FCF margin outlook.

However, since then, analysts have raised their revenue forecasts. The news today that Google may use Marvell Technology could push its revenue forecasts even higher.

As a result, its FCF and FCF margins could push the stock even higher.

For example, analysts now project $14.80 billion in revenue for next year. Assuming Marvell can make at least a 20% FCF margin, its future FCF could be:

  $14.80 billion FY 27 revenue x 0.20 = $2.96 billion FCF

So, using a 56x FCF multiple (i.e., a 1.785% FCF yield metric), the stock could be worth almost $166 billion:

  $2.96 b FCF x 55 = $165.76 billion market value

That is 22% higher than today's market value of $135.9 billion, as calculated by Yahoo! Finance. So, MRVL's price target could be about $190 per share:

  $155.51 x 1.22 = $189.72 price target

Moreover, if today's news leads to higher revenue projections next year, the price target could be higher. Once analysts catch up, the stock could move higher.

So, this could be why there is so much activity today in Marvell Technology (MRVL) call options.