Marvell Technology Group's Value Is More Opportunity Than Trap

Cory is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Marvell Technology Group (NASDAQ: MRVL) is an international chipmaker with a very diverse portfolio of switching, transceiver, wireless and storage solutions that keep communications infrastructure humming along quickly and efficiently. Its diverse range of products help power Microsoft Surface tablets, Google TVs, and perhaps most importantly, a diverse range of cloud services.

Accelerating weakness in PC sales have crippled Marvell’s net income, down 62% from $904.13 million in January 2011 to $337.15 million in October 2012, along with its share price. Although well off its post-election 52 week low of $7.36, the company is trading just a hair above its book value making it a potential value play that deserves further analysis.

When evaluating potential long term investments, The Motley Fool favors the ‘SWOT’ method. A balanced look at Marvell’s Strengths, Weaknesses, Opportunities and Threats should help us decide if Marvell is a value opportunity, or a value trap.

Strengths

  • Liquidity. Marvell is currently carrying no long term debt on its balance sheet. For a decade, Marvell has exhibited exceptional financial discipline. As of Oct. 31 the company’s current ratio was 4.626. This is not uncommonly high for Marvell Technology. The company’s current ratio has slipped below 2 only once, in Jan. 2007, during its history as a publicly traded company.
  • Committed leadership. Dr. Sehat Sutardja is widely regarded as a pioneer of the modern semiconductor age. He and his brother Pantas founded Marvell Technology in 1995 and are still active in every aspect of the company’s operations. Sehat acts as Chairman, President and CEO. Pantas is the Chief Technology Officer, Chief R&D Officer, Vice President and Director. Together the brothers currently own about 85 million shares of the company.
  • Shareholder Appreciation. In July of 2012 Marvell began offering a $0.06 per share dividend. At its current price that is a slightly above average 2.75% yield. Considering the company’s exemplary financial discipline, that dividend seems rather safe. Increasing shareholder value through stock buybacks has also become a priority for the company. Since January 2011, Marvell has reduced its number of outstanding shares by 18.9%, from 659 million to 535 million.

Weaknesses

  • Struggling Customers. The the market for traditional hard disk drives has plunged over the past two years and taken a significant portion of Marvell’s revenues with it. Western Digital (NASDAQ: WDC) is still one of Marvell’s largest customers, and they are sharing each other’s pain.
  • Mobile and Wireless. Marvell’s mobile and wireless revenues spiked in 2011 along with its stock price. After Research in Motion dropped the company in favor of Qualcomm (NASDAQ: QCOM) those mobile and wireless revenues dropped significantly.

Opportunities

  • Hybrid drives. Marvell’s relationship with Western Digital is simultaneously its biggest weakness and its greatest opportunity. The hard drive manufacturer is extremely optimistic about the future for “hybrid” drives. These are basically standard hard drives with a NAND flash component. The bulk of user data is kept on the platter, but frequently accessed data is moved to the NAND flash segment of the drive. This allows consumers the lower price and higher storage of a traditional drive along with the speed of a pure SSD.
  • Networking. This is Marvell’s most consistent end product segment. Worldwide data consumption and infrastructure growth are as reliable as death and taxes. As the popularity of cloud computing continues to rise, so should the company’s networking revenues.

Threats

  • Qualcomm. Qualcomm keeps eating Marvell’s mobile pie. It has taken the Blackberry 10 and China Mobile’s version of the Nokia Lumina 920. Qualcomm is also rumored to be offering a reference design for phones supporting China Mobile’s existing 3G TD-SCDMA and the growing 4G TD-LTE network. This would further cut into Marvell’s share of China’s TD-SCDMA baseband chip market.
  • Declining Chip Market. In the long term, cloud computing equipment manufacturers will outsmart themselves. The efficiency that will make their products popular will eventually lead to a decline in sales. Hardware installed in server rooms is rarely upgraded until something much better and faster comes along, but even then a single server meets the needs of hundreds of employees. Without a need to upgrade employee terminals every few years, the demand for integrated chips has nowhere to go but down.

Overall, Marvell is a well run organization on sale for a great price. Of all the companies that have taken severe hits from weak PC sales, I think Marvell is best positioned to survive and thrive. Admittedly, I wasn’t paying attention to Marvell during the post-election clearance sale. I’ve decided to wait until Christmas before opening a long position on Marvell. If Santa brings me the fiscal-cliff-political-gridlock I asked for, the company’s shares should decline to around $7 again and I’ll happily snap up enough to fill my stocking.

 


crenauer owns shares of Western Digital. The Motley Fool owns shares of Qualcomm and Western Digital. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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