An Opportunity May Arise if This Stock Crashes Post Earnings

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Editor's Note: The initial version incorrectly referred to Eagle Asset Management as a hedge fund, actually it is the asset management arm of Raymond James Financial. This version has been updated and Motley Fool apologizes for the error.

Chipmaker Marvell Technology (NASDAQ: MRVL) is on a roll this year with the stock gaining close to 60%. This performance is remarkable when we consider that the stock had crashed close to 50% in 2012 as its business faced stiff competition from all sides.

While investors will certainly be happy with Marvell’s terrific comeback, its upcoming first-quarter report, which is set to be released on May 23, will play a pivotal role in determining the stock’s direction. Let’s see what is expected of Marvell and whether it can satisfy the Street’s expectations with a decent outlook.

On revenue

Analysts, according to Yahoo! Finance, expect Marvell to post revenue of $721.6 million, which would translate into a decline of 9.4% from the year-ago period if the company hits the mark. However, Marvell shouldn’t have much difficulty in hitting the revenue target as it had called for revenue between $700 million and $740 million on its last earnings call, and this was comfortably ahead of consensus estimates.

On earnings

Analysts expect Marvell to earn $0.14 a share, which isn’t surprising considering that the company itself had called for such a figure on its previous conference call. However, Marvell had earned $0.23 a share in the year-ago period and its upcoming first-quarter results will most probably show a steep decline in earnings, until and unless it miraculously springs a huge positive surprise like last time.

The earnings outlook for the current fiscal year isn’t positive as well, as analysts expect earnings to decline to the tune of 9%.

On outlook

Thus, on a year-over-year basis, Marvell’s results would probably paint an ugly picture. However, the stock’s direction would come down to what management says over the conference call. According to the commentary on the previous conference call, Marvell’s end businesses should continue to improve.

As Fool analyst Michael B. Lewis pointed out, Marvell’s mobile business seems ready to bounce back. The company’s presence in the Chinese smartphone market could well be one of its major catalysts this year. Chinese consumers are slowly upgrading from budget phones to feature smartphones. This would lead to a huge upgrade cycle in the Middle Kingdom.

Marvell seems to have positioned itself to try and gain as much as possible from this market and its product development initiatives seem promising. Earlier this year, the company had announced a competitive new chip for the Chinese market and it has been investing aggressively into research and development in a bid to get better.

However, a potent threat to Marvell’s business comes from Qualcomm (NASDAQ: QCOM), which is targeting the burgeoning Chinese market. The maker of Snapdragons had introduced three chips for phones targeted at entry-level smartphones in the Chinese market last year and followed it up with two more chips late last year. In addition, Qualcomm has been growing its relationship with China Mobile, supplying it with TD-SCDMA chips last year. This is one major threat that Marvell should be wary of.

If we take a look at the other two segments of Marvell’s business -- Networking and Storage -- both of them did well in the previous quarter and the trend would probably continue, driven by sales of solid-state drives (SSDs) and a better telecom spending environment from last year.

Marvell’s businesses seem to be improving and if management provides further evidence that the recovery is set to continue, then it should continue its fantastic run going forward. However, competition is really stiff and the company’s rich valuation (21 times trailing earnings) doesn’t make it a buy at current levels.

But, if the stock plunges for any reason post earnings and if the valuation comes down to reasonable levels, then Marvell might become an attractive stock to buy, provided its businesses are really showing signs of promise. For the complete analysis of Marvell’s upcoming results and its probable direction going forward, check back this space again next week.

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Harsh Chauhan 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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