Marvell Technology And Billionaire David Einhorn's Investor Letter

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Why does Einhorn still believe in Marvell Technology? After breaking down what billionaire David Einhorn and Greenlight Capital is betting on for 2013 it is time to look at why he is still a big believer of Marvell Technology (NASDAQ: MRVL)Per Greenlight's fourth quarter 2012 letter to investors, the hedge fund managed to return 4.9% during the fourth quarter. Since inception in 1996, Greenlight has managed to return an annualized 19.4% net of fees.  

Einhorn admits that Marvell was the hedge fund's biggest loser in 2012, having fallen from $13.85 to $7.26. Yet, the stock has recovered some of this in 2013, now trading around $9.50. Putting the pressure on the stock has been earnings under-performance and a verdict that will require Marvell to pay out some $1 billion to Carnegie Mellon University for patent infringement. 

 Einhorn said this about why, despite its recent troubles, Marvell is still in his portfolio…

 Though we’d love to just admit we are wrong, sell the stock, and move on, we continue to like the opportunity here. Marvell is on the cusp of a large product transition which, to put it mildly, is not in the valuation. 

The disk drive business continues to be weak thanks to a declining PC market. However, plans to become more competitive in the mobile market should be what helps Marvell meet its margin targets, where its current operating margin is around 14%, versus its target of 20% to 25%.

Other notable semiconductor plays include NVIDIA (NASDAQ: NVDA), Qualcomm (NASDAQ: QCOM), Texas Instruments (NASDAQ: TXN) and Intel (NASDAQ: INTC)Longer-term demand for NVIDIA should be a product of the fast growing mobile market, namely new graphics processors, which is 60% of revenues. However, the company still has reliance on the PC market. Qualcomm is one of the best semiconductor picks in the industry, namely due to its exposure to the mobile market. This includes its high margin WCDMA business, where gross margins were over 60% for the trailing twelve months. Texas Instruments posted recent earnings that showed EPS at $0.23, compared to $0.25 for the same quarter last year. This is on the back of revenues that were down 13% year over year. Texas is in the process of restructuring, with plans to move more into the analog business and away from the handset business. 

Intel, albeit the microprocessor leader, has seem some of the most robust pressure due to a declining PC market. The stock is down over 20% the last twelve months. Even with a 4.2% dividend yield, it is a tough call for me to throw investment dollars at the company. The past has served Intel well, with the company growing EPS at over 28% annually for the last five years, but the company's stock has been unimpressive over this time -- down 2% cumulatively. The next five years do not appear to be as robust, with Wall Street estimates putting annual growth at 12%. 

Stacking up all the tech companies from above, and Marvell is the cheapest, with some of the best growth opportunities:


<table> <tbody> <tr> <td> <p> </p> </td> <td> <p><strong>Price to Earnings</strong></p> </td> <td> <p><strong>Price to Sales</strong></p> </td> </tr> <tr> <td> <p><strong>Marvell</strong></p> </td> <td> <p>11.5</p> </td> <td> <p>1.7</p> </td> </tr> <tr> <td> <p><strong>NVIDIA</strong></p> </td> <td> <p>14.2</p> </td> <td> <p>1.8</p> </td> </tr> <tr> <td> <p><strong>Qualcomm</strong></p> </td> <td> <p>15.2</p> </td> <td> <p>5.5</p> </td> </tr> <tr> <td> <p><strong>Texas Instruments</strong></p> </td> <td> <p>19.1</p> </td> <td> <p>3.0</p> </td> </tr> <tr> <td> <p><strong>Intel</strong></p> </td> <td> <p>10.9</p> </td> <td> <p>2.0</p> </td> </tr> </tbody> </table>


<table> <tbody> <tr> <td> <p> </p> </td> <td> <p><strong>Five Year Earnings Growth (Wall Street estimates)</strong></p> </td> </tr> <tr> <td> <p><strong>Marvell</strong></p> </td> <td> <p>12%</p> </td> </tr> <tr> <td> <p><strong>NVIDIA</strong></p> </td> <td> <p>10.7%</p> </td> </tr> <tr> <td> <p><strong>Qualcomm</strong></p> </td> <td> <p>14.6%</p> </td> </tr> <tr> <td> <p><strong>Texas Instruments</strong></p> </td> <td> <p>9%</p> </td> </tr> <tr> <td> <p><strong>Intel</strong></p> </td> <td> <p>12.3%</p> </td> </tr> </tbody> </table>

In looking over the valuation metrics, Marvell and Intel are two of the cheapest stocks, and the two also have solid growth estimates, so which is better? Based on Marvell's ability to generate cash and balance sheet, Marvell may well be the best bet:  

Cash Flow Growth

<table> <tbody> <tr> <td> <p> </p> </td> <td> <p><strong>Historical Five Year Cash Flow Growth</strong></p> </td> </tr> <tr> <td> <p><strong>Marvell</strong></p> </td> <td> <p>68%</p> </td> </tr> <tr> <td> <p><strong>NVIDIA</strong></p> </td> <td> <p>7%</p> </td> </tr> <tr> <td> <p><strong>Qualcomm</strong></p> </td> <td> <p>11%</p> </td> </tr> <tr> <td> <p><strong>Texas Instruments</strong></p> </td> <td> <p>-4%</p> </td> </tr> <tr> <td> <p><strong>Intel</strong></p> </td> <td> <p>9.5%</p> </td> </tr> </tbody> </table>

Balance Sheet

<table> <tbody> <tr> <td> <p> </p> </td> <td> <p><strong>Debt Ratio</strong></p> </td> <td> <p><strong>Current Ratio</strong></p> </td> </tr> <tr> <td> <p><strong>Marvell</strong></p> </td> <td> <p>0%</p> </td> <td> <p>4.6</p> </td> </tr> <tr> <td> <p><strong>NVIDIA</strong></p> </td> <td> <p>0%</p> </td> <td> <p>4.5</p> </td> </tr> <tr> <td> <p><strong>Qualcomm</strong></p> </td> <td> <p>0%</p> </td> <td> <p>3.4</p> </td> </tr> <tr> <td> <p><strong>Texas Instruments</strong></p> </td> <td> <p>28%</p> </td> <td> <p>2.4</p> </td> </tr> <tr> <td> <p><strong>Intel</strong></p> </td> <td> <p>16%</p> </td> <td> <p>2.4</p> </td> </tr> </tbody> </table>

Don't be fooled. I am admirer of Einhorn and would consider taking a closer look at what Marvell has to offer investors. Einhorn has been investing in Marvell since the third quarter of 2011, and while it might appear he is trying to catch a falling knife, where the stock has continued to slide more than 35% since the end of 3Q 2011, there is still hope for the company. To boot, the tech company pays a 2.5% dividend yield. 

See what else we found in Einhorn's letter, Part 1 (Saviors of 2012), Part 2 (Big Bets for 2013)


mhargra has no position in any stocks mentioned. The Motley Fool recommends Intel and NVIDIA. The Motley Fool owns shares of Intel and Qualcomm. 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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