Key insights
- Marvell Technology (MRVL) has been added to the S&P 500, a significant event for index investors and ETFs that must purchase the stock. This inclusion highlights the growing influence of AI-related companies within major market benchmarks. While the stock saw an initial surge, its subsequent dip suggests mixed sentiment. The addition underscores the importance of monitoring index rebalancing for potential market movements and sector representation shifts, particularly in the AI and semiconductor spaces.
More and more artificial intelligence names continue to invade the broader benchmark S&P 500 Index.
The latest addition is the semiconductor company Marvell Technology (MRVL 10.20%). The stock surged on the news yesterday but had fallen by more than 7% as of 11:13 a.m. ET today.
Being added to the S&P 500 is a big deal because it is one of, if not the most followed, indexes and market benchmarks in the world.
Additionally, index funds, exchange-traded funds (ETFs), and even active managers that track the index must buy any stock added to the index.
Investors should monitor changes in the S&P 500 because many simply invest in the broader market by gaining exposure to it. Historically, the S&P 500’s performance has been very hard to beat over the long term.
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The S&P 500 conducts quarterly rebalancing, in which it removes companies that no longer meet its inclusion requirements.
This can happen due to a shrinking market cap or if a company no longer meets the index’s liquidity and profitability requirements. Companies can also be acquired or merge with another company.
When companies are removed, others are added, so the market-weighted index always has about 500 companies.
To be included in the S&P 500, a company must be based in the U.S. and have a market cap of at least $22.7 billion. The company must also have most of its shares traded on the public market and have traded at least 250,000 shares in each of the last six months.
A qualifying company must also have been publicly traded for at least a year and have positive total net income over the preceding four quarters.
Marvell is involved in the AI trade in multiple ways.
The company makes custom chips that compete with more general-purpose graphics processing units (GPUs) in certain scenarios.
Custom chips can be better for inference of a large language model (LLM) for a specific task used at scale. But Marvell also plays a critical role in the AI supply chain, especially as GPU clusters scale.
The company makes other infrastructure, such as Ethernet switch chips, digital signal processors, and photonics, that effectively enable all GPUs in a data center to communicate with one another and even between multiple data centers.
Marvell’s stock is up nearly 193% this year.
It got a big lift not long ago when Nvidia’s CEO Jensen Huang said he expects Marvell to be the next $1 trillion market cap company. Marvell currently trades at a market cap of around $235 billion.
“When you take a computing problem, and you disaggregate it into a lot of parts, and you distribute it across the entire data center, what’s necessary is connectivity,” Huang said at a recent trade show. “That’s the reason why Matt’s (Marvell CEO Matt Murphy) doing so well. That’s the reason why Marvell is so essential.”
Marvell stock is not cheap, trading at nearly 64.5 times forward earnings and nearly 20 times forward revenue.
This means it will likely live and die with the AI trade. If AI capital expenditures keep growing and GPUs and data centers keep scaling, the stock is likely to do well.
More general investors buying the S&P 500 should be cognizant that, as AI grows, it continues to consume a larger share of the S&P 500, so investors may be less diversified than they once were.