Is This Stock a Value Play or a Value Trap?

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

Sometimes, when a stock is trading at cheap levels, it becomes difficult to judge whether it’s a value play or a value trap. A wrong judgment could lead to a bad investment while a correct decision might lead to terrific returns.

Today, we will take a look at semiconductor company Marvell Technology (NASDAQ: MRVL), which makes chips that are used in a variety of applications, and recently posted in-line third-quarter results.

Mobile and wireless, storage drives and networking equipment – these are the applications where Marvell’s chips are used. The company had a decent first quarter this year, but a number of factors pulled it down in the second. Even though the recently-reported third-quarter was at par with expectations, a weak outlook for the ongoing quarter suggests that Marvell might not get out of soup in a jiffy.

However, we at Fool.com are staunch advocates of long-term investing and hence, it would make sense to weigh what could work for Marvell against what might not in the long run. Also, considering the stock’s trailing P/E of 8.24, which is handsomely cheap as against the 19.97 industry average, a dividend yield of 3.2% and a stock price which is close to its 52-week lows, Marvell seems like a value play. But is this the case? Let’s check it out.

What Might Work for Marvell

Networking is Marvell’s stronghold, and this segment is one of its most consistent performers. It accounts for one-fourth of its top line and the company expects this business to grow strongly in the future. Marvell’s management expects to gain from growth in data consumption and building of infrastructure for faster networks.

In addition, Marvell is developing new products for delivering better solutions to its customers, and counts on these products to help it ride the growth in networking infrastructure. Moreover, tremendous growth in cloud computing is another reason for my bullishness on Marvell’s networking business.

As the cloud expands, the need for datacenters for storing data on the cloud will also jump. Marvell, with its ARM-based architecture, is looking to benefit from growth in datacenters and has a strong product portfolio to attract customers.

The current situation in the networking infrastructure space might not seem to be a pretty one due to macroeconomic conditions, but over the long run companies should eventually start building infrastructure aggressively in order to meet the need for growing data. And this is when Marvell’s networking business should marvel in all its glory.

Also, the company is looking to evolve its storage business with time. Marvell is focused on building solutions for hybrid drives, which are expected to grow at a decent rate in the future. Seagate Technology (NASDAQ: STX) and Western Digital, which are Marvell’s clients, already have their versions of hybrid drives in the market.

For example, Seagate’s Momentus hybrid drive promises the speed of a solid-state drive (SSD) along with the capacity that we get on a traditional hard drive. Seagate itself is finding it difficult to survive in a tough PC market and is looking to adapt through hybrid drives and SSDs. Hence, if hybrid drives do click in the future, Marvell and its customers would once again do well. In addition, Marvell’s SSD business is another area where the company can make huge leaps.

The SSD business grew 25% in the previous quarter, and has been recording such gains for some time now. With rapid growth in mobile computing, demand for SSD’s is expected to explode and Marvell, due to its relationship with major storage players such as Seagate and Western Digital, is also poised to gain from this boom.  

Why Marvell Seems Like a Value Trap

However, the odds stacked against Marvell also couldn’t be ignored. The company was once a well-known name in the smartphone industry by virtue of its relationship with Research In Motion (NASDAQ: BBRY), the beleaguered BlackBerry maker which is trying to get back on its feet again.

Marvell used to supply processors to RIM for BlackBerry phones but it has now lost that spot to Qualcomm (NASDAQ: QCOM). RIM is expected to use Qualcomm’s Snapdragon S4 processor in its life-saving BlackBerry 10 devices which are expected to be released next year, and hence, the loss of this customer might prove to be a bad one for Marvell if RIM’s new devices are successful.

But RIM is not the only place where Qualcomm is giving Marvell competition. Qualcomm is making its presence felt in the TD-SCDMA market in China. Its Snapdragon processor is present inside the TD-SCDMA version of the Nokia Lumia 920 which is being offered by China Mobile in the region. Hence, the fact that Marvell’s mobile business declined once again in the previous quarter isn’t surprising.

In addition, I’m not entirely convinced by Marvell’s prospects in storage as well. Both Seagate and Western Digital are struggling due to weak PC sales. As more consumers move onto mobile devices such as tablets, and use the cloud for their storage needs, the requirement of traditional drives will go down significantly.

Even though storage companies are innovating with SSDs and hybrid drives, the transition would be rough as Seagate and Western Digital, Marvell’s customers, don’t enjoy the same amount of hegemony in the SSD market as they do in the traditional drive market. The storage business brings in almost half on Marvell’s revenue and so, this transition is a serious point of concern and makes Marvell more of a value trap.

The Takeaway

It would be wrong to say that the pros and the cons are equal for Marvell, as the networking business seems to be the only one running without much trouble. The storage business is currently under pressure while mobile and wireless is declining. Hence, even though the stock is cheap and it offers a good dividend yield, Marvell tends towards the tag of a value trap more than a value play. What do you think?


TechJunk13 has no positions in the stocks mentioned above. The Motley Fool owns shares of 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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