Marvell can still Marvel in the Long Run

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

After marveling in the first quarter, I thought that Marvell Technology (NASDAQ: MRVL) was ready to fly. It had beaten estimates, sounded out a terrific outlook and its end markets were on a roll. Cut to the present, there’s uncertainty everywhere. Marvell missed estimates, and added to investors’ misery with a really glum outlook which sent the stock crashing.

What actually happened has been quite well-documented all over the web space. Macroeconomic weakness, soft PC demand, low shipments to a “North American client” i.e. Research In Motion (NASDAQ: BBRY) and sluggishness in the TD-SCDMA market in China weighed on Marvell’s performance in the just-concluded quarter.  

All these factors have taken the stock perilously close to its 52-week low. Now the question is can it bounce back from here. I will check the prospects of each of its businesses, and see if it still makes for a good long-term investment.

Where would Storage go?

Storage makes for 47% of Marvell’s top line. In the near-term, slow PC sales are anchoring the segment’s prospect which isn’t entirely unexpected. Management states that HDD customers are projecting flat demand in the third quarter, a fact which finds further credibility from Seagate Technology’s (NASDAQ: STX) expectation of flat sales in the September quarter. However, Marvell says that its storage business has got room to run if we wish to look ahead of the short-term hiccups.

Firstly, the company expects PC sales to rebound as Windows 8 is rolled out. This would probably lead to an improved demand for its chips used in hard-drives. Again, the company is seeing strong demand for its 500-gigabyte per platter mobile drive. This product has been on a roll for some time now and grew 30% in the previous quarter, forming one-third of total shipments. Marvell enjoys a technology lead over its peers through this product since it is the sole provider of such technology.

The company already has a new customer through this product and expects to record some more gains going forward. Also, Marvell has been investing in compact drive technology for a long time and is strategically positioned to gain from Ultrabooks with its chips for small compact HDDs. Its 7-millimeter and 5-millimeter form factors have been developed to tap into the potential offered by hybrid drives and tablets.

In addition, Marvell’s SSD business has been on a growth trajectory and grew 25% in the previous quarter, driven by new customers. Moreover, the company has been recording more design wins and expects to sport its SSD controllers in a number of Ultrabooks and hybrid devices. As a result, Marvell expects its SSD business to grow another 25% in the current quarter. Hence, the overall feeling that Marvell’s storage business radiates for the long run is a positive one.

Wireless gives the Goosebumps

The wireless segment makes for 27% of the top line, and is in some serious soup. Low shipments to beleaguered BlackBerry maker RIM weighed on the top line. RIM has been delaying the launch of its BB10 phones for ages, leading to lower orders for components. However, when RIM finally decides to launch the phones, the chipmaker can expect to receive a shot in the arm, albeit temporarily. But RIM’s fall from dominance isn’t good for Marvell and the company needs to buck up its position in the Chinese TD-SCDMA market as RIM trudges towards extinction.

But Marvell is facing tough challenges in the highly competitive TD-SCDMA market. Increasing competition from the likes of Spreadtrum Communications (NASDAQ: SPRD), which itself had an off quarter due to a shift in consumer preference towards low-cost phones, is certainly a point of concern. Both Spreadtrum and Marvell compete against each other for supplying TD-SCDMA chips to China Mobile.

Marvell, like Spreadtrum, expects a slowdown in demand for these chips in the short-term due to economic reasons. However, looking from a longer-term perspective, I expect demand to return in the region as the economy springs back to life. Also, consumers on China now prefer low-cost smartphones and Marvell expects to grab a share of this market through its unified 3G platform. In addition, Marvell’s unified chip is used by Samsung for some of its Galaxy phones and looks set to gain more acceptability in the future.

The problems in Wireless are a bit serious, especially with RIM. But Marvell expects to offset losses from RIM through sales in China. However, shipments in China are subdued now and this isn’t helping. In addition, the market is downright competitive and Marvel will need to pull up its socks in this segment. The wireless market is really important for Marvell and I see potential here. It might be beaten down due to external factors but once it gets up and running, Marvell would be better positioned to gain from it.

What’s up with Networking

The networking business, which forms 22% of Marvell’s revenue, was a bright spot in the quarter. The company has been outperforming the broader market driven by its innovative new products which grew 25% sequentially. Marvell is selling its network processor solutions to industry titans like Ericsson, ZTE and Huawei. Moreover, Marvell expects this business to grow further on the back of its new products.

The takeaway

Thus, Marvell’s two businesses look better but the wireless one is not in the best of health now. If your risk appetite permits, you might take a look at Marvell and expect its wireless position to improve in the long run. The company’s efforts of returning cash to shareholders through a dividend yield of 2% and share buybacks are laudable. Moreover, a debt-free balance sheet is another point of attraction.

Marvell’s fundamentals are in place but its end-markets are facing short-term headwinds. Hence, if you are ready for the long-haul, Marvell presents an interesting opportunity at its beaten-down levels.

TechJunk13 has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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.If you have questions about this post or the Fool’s blog network, click here for information.

blog comments powered by Disqus