Is Marvell Technology a Momentum Stock or a Solid Long-Term Play?

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Chipmaker Marvell Technology’s (NASDAQ: MRVL) recently reported fourth-quarter results must have reinstated investors’ faith in the company, as it handily beat consensus estimates and issued a solid guidance for the current quarter.

Revenue of $775 million was 4.4% higher than last year, and comfortably ahead of the $720.9 million analyst estimate. Also, Marvell delivered a solid bottom line beat by earning $0.19 on a non-GAAP basis while the Street expected $0.13. Moreover, Marvell’s expectation of $700 million to $740 million in revenue and adjusted earnings of $0.14 for the ongoing quarter is easily ahead of the Street expectation.

Undoubtedly, these results provided further momentum to the shares which have already gained 36% this year, including a 4.5% jump after earnings. But, is this optimism here to stay?

Marvell might have handsomely beat estimates in the previous quarter, but those estimates were already quite low after the company had issued a weak outlook on its third-quarter conference call. Moreover, it seems Marvell’s rally over the past three months is based more on expectation and speculation, since the stock was trading at dirt-cheap levels and investors saw a possible value play.

However, Marvell currently trades at a trailing P/E of 17 times which doesn’t make it a value play anymore. Thus, the question is, whether investors would be in for a similar rally going forward or whether exiting their Marvell position would be a prudent idea.

There are catalysts and positives for Marvell going forward. But in addition, the threats that it faces seem quite potent as well. We’ll try and see if Marvell can sustain its momentum in the future and whether it still deserves a place in your portfolio. First, let’s start with the positives.

Storage on a roll

The company supplies storage drive controllers and system products to the leading lights of the storage business, namely Seagate Technology (NASDAQ: STX) and Western Digital. Marvell managed to gain share in its hard-disk drive business to the tune of 5 percentage points while overall storage business grew 5% on a sequential basis. The company expects its HDD business to keep improving as the year progresses on the back of new design wins.

More importantly, Marvell witnessed an impressive growth of 40% in its solid-state drive (SSD) business and commands half of the merchant SSD market. Marvell has established relationships with tier 1 manufacturers of flash memory and these customers are now gaining market share, which in turn bodes well for Marvell. Also, the company’s hybrid SSD solution has continued its impressive growth and it expects more shipments by its customers this year.

Thus, the storage business, which accounts for half of total revenue, seems quite well-positioned for further growth at the moment.

Networking shows its mettle

Marvell’s networking business has grown pretty well in the past and the trend continued in the previous quarter. Even though overall industry conditions weren’t conducive for Marvell, it delivered modest improvement in this business whereas its peers witnessed a decline. The company expects 2013 to be a good one for its networking business, driven by investments in infrastructure by telcos and build out of data centers for cloud computing.

Marvell’s ARM-based architecture should help it ride the cloud computing boom while an uptick in carrier spending would be another tailwind. The prospects for this business, which makes for 23% of total revenue, look bright this year and propel Marvell’s top line higher.

What about mobile?

The mobile business had suffered a lot in 2012 as Marvell’s major customer BlackBerry (NASDAQ: BBRY) was in the midst of a product transition. Hence, it was not surprising that its mobile and wireless business fell 11% on a sequential basis. Things could have been worse of Marvell had it not been for BlackBerry, which ramped up orders for building its new BlackBerry 10 devices.

Going forward, Marvell enumerated a number of drivers for this business. It expects to land some more design wins, driven by its new products which are expected to aid in revenue growth. Marvell also expects growth of 3G/4G to boost its business and has made some moves to tap the maximum out of it. The company recently released a quad-core based chip which supports 4G globally apart from various 3G bands.

Apart from this, Marvell also launched a powerful 3G chip aimed at budget smartphones and tablets for the emerging markets and most importantly China. Thus, Marvell is ticking the right boxes in order to benefit from growth in sales of mobile devices.

The threat to storage

So far so good, but the threats to Marvell’s business are quite serious ones. Firstly, declining sales of PCs pose a problem and Marvell accepts this fact when it says that they have to prepare for a decline in the total addressable market for HDDs. For instance, Marvell customer Seagate’s previous quarterly report revealed that shipments of hard-drives went down 3% in the quarter, and the company is looking at SSDs to drive growth in the future.

Even though Marvell is also focusing on SSDs for growth, the transition is capable of hurting the company in the future since PCs account for a sizable chunk of HDDs. Also, Marvell is in a soup after it was found guilty of infringing patents related to a hard-disk drive technology patented by Carnegie Mellon University.

Marvell was fined $1.17 billion and there’s a possibility of the fine tripling. However, Marvell is confident it didn’t do any wrong and is trying to get the verdict overturned. The picture would become clearer in May or June but till then this fact should be kept in mind if investors are considering adding more of Marvell their portfolio.

Can mobile really grow?

As far as the mobile business is concerned, Marvell faces uncertainty and stiff competition in this space. While better orders from BlackBerry were tailwinds in the previous quarter, and might continue to be so in the near future, the durability of revenue from BlackBerry in the long run can’t be established just yet.

Early signs about BlackBerry 10 sales haven’t been encouraging as analysts have slashed their sales forecast. Keeping this in mind, one shouldn’t expect too much from Marvell’s BlackBerry account as the Canadian phone maker hasn’t been able to reclaim its magic yet it seems and there are serious doubts whether it will be able to do so or not.

But BlackBerry isn’t Marvell’s only problem, there’s a bigger one in the form of Qualcomm (NASDAQ: QCOM). While Marvell unveiled a chip that would solve LTE fragmentation, chip behemoth Qualcomm also did the same. Qualcomm’s solution supports 40 different LTE bands apart from being thin and delivering solid efficiency. Moreover, Qualcomm has taken business away from Marvell in the past as well by landing the processor spot inside the latest BlackBerrys and it won’t be surprising if it rains down on Marvell once again.

Moreover, Qualcomm is already making forays into the TD-SCDMA market in China, which is one of Marvell’s strongholds. Moreover, chipmakers such as MediaTek in the budget smartphone and tablet segment makes Marvell’s job difficult.

The takeaway

As I said earlier, Marvell is no more a value play and investors need to keep a close eye on where the company is headed. While management is quite upbeat about its mobile prospects, the challenges are quite stiff. The storage business has been doing well and Marvell is trying its best in increasing SSD sales, but declining sales of PCs might hurt it going forward. There’s a lot of positive sentiment around Marvell, but investors need to take things with a grain of salt due to the threats faced by the company.

TechJunk13 has no position in any stocks mentioned. 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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