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For everything (turn, turn, turn) there is a season. There's no reason for Netflix (Nasdaq: NFLX  ) to spend its hard-earned and incredibly useful cash on share buybacks, and I'm not afraid of telling 'em. But it's a whole different ball of wax for chip designer Marvell Technology (Nasdaq: MRVL  ) , and this buyback has my wholehearted support.

As part of last night's second-quarter report, Marvell announced a $500 million share repurchase program. The stock is trading at a 35% discount to 52-week highs, and you can get a share for a low, low 12.5 times trailing earnings. That's after the 11% overnight jump. I love Netflix, but that stock is fully valued today; Marvell has return-on-investment reasons to start a buyback.

In the words of Chief Financial Officer Clyde Hosein: "In our financial model, we believe that the current stock price is not reflective of what the business model is, and we intend to be active purchasers around this range." I love it when management comments make sense.

That overnight jump is also qualified by excellent results. Slow sales in the hard drive controller division were more than made up for by brisk business in the wireless and wired networking segments. Overall, sales increased by 40% year over year to $896 million and non-GAAP earnings more than doubled to $0.40 per diluted share. Free cash flow increased by 23% compared with the first quarter and 67% year over year, and more than 32% of Marvell's revenue turns into beautiful, shareholder-friendly free cash.

As impressive as these numbers are, there's still room for improvement. I'll remind you that semiconductor sector peer Analog Devices (NYSE: ADI  ) grew sales by 46% year over year while head-to-head competitor Atheros Communications (Nasdaq: ATHR  ) reported revenue gains of 112%. Marvell's bread-and-butter division is still the hard drive controller segment, which was hurt by nervous drive builders overstocking on components in the first half of the year, just in case they'd need it later. Western Digital (NYSE: WDC  ) and Toshiba contributed for nearly 40% of the company's revenue last fiscal year, so when they curtail orders, that's a major anchor on Marvell's results.

If everything is back to normal now, Marvell should keep growing apace with the rest of the industry, if not faster. Wireless communications and high-capacity storage are still Pavlovian drool words in this market, and management alluded to a number of mysterious, unnamed products due to hit retail shelves with new Marvell chips inside.

I see every reason to applaud Marvell's buyback, because I agree that the stock is severely undervalued. My CAPS portfolio has a longtime "outperform" rating on this stock, and I think you should follow my All-Star lead.

Fool contributor Anders Bylund holds no position in any of the companies discussed here, but he does a mean Roger McGuinn on his trusty 12-string. Netflix is a Motley Fool Stock Advisor pick. Atheros Communications is a Motley Fool Hidden Gems recommendation. The Fool owns shares of Atheros. Try any of our Foolish newsletter services free for 30 days. You can check out Anders' holdings and a concise bio if you like, and The Motley Fool is investors writing for investors.

Read/Post Comments (3) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 20, 2010, at 9:52 PM, TMFSpeyside wrote:

    Sorry, I like Marvell, but I can't get excited about the buy back. In the latest conference call, MRVL announced in their outlook for the next quarter that they expect to exit with 675 million shares outstanding, excluding consideration of the buyback. According to Yahoo!, they currently have 644M shares outstanding. If you subtract 644M from 675M and multiply by today's share price, you get -- lo and behold -- $500M. So I believe they are just buying back the same number of shares they are issuing to their employees for incentive programs.

  • Report this Comment On August 20, 2010, at 9:58 PM, xuincherguixe wrote:

    Yahoo is pretty bad with this sort of information. I wouldn't trust anything from them.

  • Report this Comment On August 24, 2010, at 8:59 PM, TMFSpeyside wrote:

    I checked and Yahoo is only off by 6M shares. From the MRVL press release about the share buyback:

    "The repurchases, which are expected to be funded from Marvell's current cash and short-term position of over $2.3 billion, may occur in open market, privately negotiated or block transactions. As of July 31, 2010, Marvell had approximately 650 million common shares outstanding. "

    From the conference call last week (referring to next quarter):

    "We currently believe the diluted share count will be approximately 675 million shares, excluding the potential impact from any share repurchases during the quarter."

    They had about 37M shares of options outstanding (employee compensation) at the time of their last SEC 10Q filing that is included in the diluted count, and that were not there a year ago. The share buyback is simply making up for dilution caused by these options, I believe.

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