Three Risks Marvell Technology Faces In The Year Ahead

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 one of Greenlight Capital's largest positions, comprising nearly 5.9% of its tech-heavy portfolio. David Einhorn has had to defend his decision to keep such a large position in this very well managed company several times over. Rather than defend my position in this company, I would like to discuss three serious risks to Marvell's future.

Marvell is highly dependent on several customers for a majority of its revenues

During the fiscal year ended Jan. 29, 2011, 14% of Marvell's net revenues came from BlackBerry. Declining Blackberry sales caused more than a hiccup at Marvell. The struggling smart-phone maker no longer comprises more than 10% of Marvell's revenues, but this exemplifies just how quickly fortunes can change in this industry.

Although the company creates integrated circuits found in a wide variety of products, most of the company's revenues are still dependent on hard drive sales. Recent consolidation of the hard drive industry into two main players makes Marvell's situation even more precarious.

During fiscal 2012, Seagate Technology acquired Samsung's hard drive operations. If that acquisition had occurred at the beginning of Marvell's FY 2012, Seagate would have comprised 11% of Marvell's net revenues for that year. Similarly, Western Digital (NASDAQ: WDC) acquired Hitachi's hard drive operations near the end of FY 2012. If the Hitachi acquisition had occurred at the beginning of FY 2012, Western Digital would have comprised 24% of Marvell's net revenues for that year.

It's no secret that the traditional hard drive industry has fallen on hard times. Personally, I think that Western Digital is oversold, and represents a strong value opportunity. The hard drive maker is currently trading at about 1.3 times its book value and has a very strong balance sheet. The well-managed company recently posted impressive fourth quarter results, which included a unit shipment gain of 108% year on year. Nevertheless, if either Western Digital or Seagate decide to drop Marvell, the results would be disastrous.

Transitioning from traditional PC hardware to mobile

Although most of you reading this in the US are well into 4G and even 4G LTE, most of China is just getting it's first taste of 3G. Now the world's largest wireless carrier, China Mobile (NYSE: CHL), boasts over 714 million subscribers, and nearly 95 million of those are 3G users. Unlike most carriers that use WCDMA, China Mobile uses TD-SCDMA technology. Marvell is desperately trying to carve out a top spot in the smart-phone applications processor field, and its relationship with China Mobile will likely become instrumental in the company's transition from hard drive applications to mobile applications processors.

Marvell recently released quad-core applications processors with integrated modems that are capable of supporting China Mobile's wireless data platform. Although dwarfed by Qualcomm and Apple, Marvell's market share of mobile apps processors is large enough to put it in the top 5 supplier list. Marvell's processors are in 3 recently launched Samsung GALAXY smartphones all built to run on China Mobile's TD-SCDMA and the more common WCDMA platform.

Marvell's move into mobile application processors has so far been reasonably successful. However, a change of heart from China Mobile or Samsung could seriously damage the comany's move into this crucial market.

Patent infringement litigation

Like any large tech company, Marvell is under constant legal attack. The company and its investors were blindsided by a billion dollar ruling against the company late last year. Back in 1967 researchers at Carnegie Mellon patented a mathematical formula for reducing signal-noise in analog to digital applications. Although Marvell has several patents for processes that it claims are more successful at reducing signal noise, a nine-member jury ruled that the company was guilty of patent infringement. The judge, in turn, fined Marvell about $1.17 billion.

As David Einhorn pointed out, there are many grounds for a dismissal. Most significantly damning to Carnegie Mellon's case is the fact that US patent law does not apply to products manufactured and sold abroad. Since none of Marvell's products are manufactured in the US and most are sold abroad the chances of this verdict holding are very slim. If this verdict does hold, or even worse if Carnegie Mellon is awarded triple its claimed damages due to willful intent, it would cripple Marvell, and lead to significant losses for shareholders like myself and Greenlight Capital.

crenauer owns shares of Marvell Technology Group Ltd. and Western Digital.. The Motley Fool owns shares of China Mobile 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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