Today's Buy Opportunity: Marvell Technologies

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When I got to kick off our "11 O'Clock Stock" series last month, I went with mobile giant Qualcomm (Nasdaq: QCOM  ) based on its ability to profit from the smartphone boom regardless of which cell phone company ended up dominant. I'm not venturing too far away on today's pick. In fact, my buy recommendation for today, Marvell Technology (Nasdaq: MRVL  ) actually competes with Qualcomm for mobile phones wins.

However, the real strength of Marvell is its ability to bridge different growth areas with its expertise. With Marvell, you're getting an established leader with exciting opportunities in several markets, and you're getting the stock on sale.

Fast Facts On Marvell:

Market Capitalization

$10.1 billion

Industry

Semiconductors

Revenue (TTM)

$3.4 billion

Earnings (TTM)

$832 million

Cash / Debt

$2.38 billion / $1.5 million

Key competitors

LSI (NYSE: LSI  ) – hard drives / Broadcom (Nasdaq: BRCM  ) – networking, mobile, wireless / Atheros-wireless

Source: Capital IQ, a division of Standard & Poor's.

Marvell is a semiconductor company that's well known for its expertise in combining multiple components onto a single, complex chip known as a System-on-a-Chip (SoC). The company used this skill set to dominate the hard disk drive industry, eventually scoring wins at every single hard disk supplier. From there, Marvell applied its expertise into networking and wireless technology, gaining scores of major design wins.

The final piece of the puzzle came into place in 2006 when Marvell purchased Intel's mobile division for $600 million. Just to illustrate what a bargain price Marvell received, Intel is now in talks with another company named Infineon to rebuy just a portion of the capabilities it sold to Marvell. The price tag: reportedly up to $2 billion.

After all these moves, Marvell is left at the forefront of several powerful trends sweeping through the information technology industry like wildfire; here's a rundown of the markets Marvell has in front of it:

  • Storage: The Economist estimates that the amount of information created each year is growing at a 60% compounded rate. What's even more impressive is the divergence between information created, and the available storage capacity. While the two largely tracked each other up through 2007, information is now being created at an exponential rate that should be more than double the available storage by 2011.
  • Networking: Ever heard of this little idea called cloud computing? Well, it requires more robust networking to push around all the data now being remotely accessed from far away servers. More importantly, increased digital transmission of media will be a huge catalyst in keeping networking spending high. Cisco's recent Visual Networking Index forecasts compounded Internet traffic growth of 34% through 2014.
  • Mobile Devices: The most impressive trend of all. While Internet traffic might be projected to grow at 34%, technological advances to more efficiently handle traffic will lead to revenue growth rates below 34% for industry players. However, with smartphones, leading IT researcher Gartner has projected revenues should continue growing by 28% through 2014. That's a stunning figure, and it's not some ridiculous estimate without basis, either. In the first quarter of this year, smartphones grew more than 49% year-over-year, and recent iPhone sellouts and exponentially rising Android sales figures are a strong clue that smartphone sales will continue exploding throughout the year.

The best part is that Marvell's recently shown the most success in the mobile and wireless area that presents the biggest market opportunity; however, Marvell's competitive position is the least assured. Here's a look at how Marvell's revenue picture has radically shifted in just three quarters:

Source: Company filings, conference calls. Networking, Wireless and Mobile Devices also includes other businesses such a printing, which contribute a lower level of revenue.

Source: Company filings, conference calls. Networking, Wireless and Mobile Devices also includes other businesses such a printing, which contribute a lower level of revenue.

Last-quarter sales to storage manufacturers fell 15% sequentially as hard disk manufacturers like Western Digital (NYSE: WDC  ) and Seagate (Nasdaq: STX  ) delayed orders to work through inventory. Marvell had guided storage growth to be flat to slightly down. For most semiconductor companies, a 15% sequential drop-off in their main segment would cause an epic sell-off when earnings came out. However, Marvell saved the quarter by achieving an amazing 50% sequential growth rate in mobile and wireless end markets thanks to broad growth across all product lines.

Marvell's not only riding the mobile trend, it's also taking market share from competitors. Remember how Marvell has always been known its for its expertise in creating Systems-on-a-Chip? Well, a main benefit of SoC's is that they can save power and take up less space, exactly the kind of attributes mobile device companies are looking for.

Valuation and risks
After taking into accounts its massive cash hoard and subtracting new stock options from its free cash flow, Marvell trades for about nine times its free cash flow, which is a pretty compelling value for a company seeing explosive growth in several end markets. However, some risks and valuation concerns remain:

  • The death of hard disks?: Marvell's storage sales are predominantly to hard disk drives, a legacy technology that's under threat from a newer technology called solid-state drives (SSDs). While SSDs should continue growing at fast rates, a significant pricing gap still exists between them and old-fashioned hard-disk drives. Marvell also has an opportunity to sell SoC's to SSD manufacturers, but its relationship isn't as strong as it is with hard disk companies, where the company sells to every supplier.
  • Networking: Unlike hard disk drives, Marvell's not the clear No. 1. While it has wins at major companies like Cisco, Juniper, and Brocade (Nasdaq: BRCD  ) , Broadcom is the dominant player in this space. In this category, Marvell doesn't have a clear competitive advantage that will allow it to keep taking market share from its larger rival.
  • Valuation: While Marvell's trailing earnings look great, there a few extra considerations.
  1. The sales, general & administrative (SG&A) expense line is suspiciously low in the past twelve months. Given their operating history, it's hard to see Marvell sustaining such low costs. This line item will probably rise in coming quarters, causing some margin loss.
  2. The company's stock-based compensation is also below levels seen in recent years. It should be expected that this will rise, causing some amount of shareholder dilution.
  3. Marvell effectively pays no taxes. The company's entire organization structure is optimized around paying as low of tax rates as possible. It's headquartered in Bermuda and has received tax benefits for construction in Israel, Singapore, the United States (California), and Switzerland. Most of the companies beneficial tax arrangements run through the latter half of the decade, but the threat of legislation (especially from the U.S.) that could change current tax status is a definitive hazard to Marvell.

Bottom line
Marvell's at the center of several powerful trends and has proven adept at applying its expertise to new markets. When the company released earnings last week, management concurrently announced a $500 million share buyback program to take advantage of what they consider to be underpriced shares. I think Marvell's leadership instincts are spot-on; we'll be taking their advice and buying some shares ourselves.

Don't forget to either hop in and ask a question or leave a thought on Marvell in the comments box below. We're giving away a subscription to Stock Advisor for the best comment on each "11 O'Clock Stock" pick this week! To see rules for the Stock Advisor giveaway, click here.

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Eric Bleeker owns shares of Cisco. Intel is a Motley Fool Inside Value pick. Atheros Communications is a Motley Fool Hidden Gems selection. The Fool owns shares of and has written puts on Intel. Motley Fool Options has recommended buying calls on Intel. The Fool owns shares of Atheros Communications and Qualcomm. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


Read/Post Comments (7) | Recommend This Article (40)

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 24, 2010, at 11:06 AM, SocialRespInvest wrote:

    A California company that takes advantage of all the US has to offer yet doesn't pay taxes?

    Instead of buying stock I think I should write a letter to my Senators advocating stripping off this tax advantage to such parasitic companies. In any case, I don't trust management to be forthright about numbers when they play games like this with taxpayers.

  • Report this Comment On August 24, 2010, at 11:12 AM, TMFRhino wrote:

    Hey everyone,

    I wrote up this article and could answer any questions people might have.

    And yes, if you don't approve of their tax methods, Marvell's probably not for you.

    Fool on!

    Eric Bleeker (TMFRhino)

  • Report this Comment On August 24, 2010, at 12:19 PM, MyunderratedLife wrote:

    With hard disks generating half Marvell's (Nasdaq: MRVL) sales, a perceived slowdown in the segment may provide an attractive entry price. Based on the company's 2nd Quarter outlook, Marvell expects storage and networking revenue to stay around current levels (which matches the slowdown expectation). However it also expects substantial growth in the mobile and wireless segment.

    The most notable pluses:

    1. Something Fools have lauded in the past: Marvell's founders continue to play a managing role in the company. Additionally, they own a commanding number of outstanding shares - thus insiders goals are more likely to be aligned with shareholders, reducing agency conflict.

    2. Another Fool favorite: The company is basically debt-free and has a strong cash position.

    3. (as mentioned in the article) It's at the forefront of the mobile devices trend. They've also begun to wet their toes in the eReader space.

    ----

    The most obvious risk or weakness would be the nature of the tech sector. The relentless pace of technology makes it difficult for any company to lay claim to anything resembling competitive advantage.

    ---

    I don’t think “tax-evasiveness” belies the company’s “forthrightness.” Considering they are well within their legal right, it’s just shrewd business sense. I like Marvell's outlook and financial strength, but the sector it does business is inclined towards innovative breakthroughs that leave slower corporations outpaced and replaced. My question is, is this a short-term investment for mobile device/storage/eReader exposure? Clearly this is a company well-positioned for the immediate future, but what about thereafter? There is certainly no shortage of competition.

    It seems that tech companies with lasting power tend to brand the end product, creating something the consumer can respond to (AAPL). As the company grows it seems they will have a harder time entrenching themselves in the lives of individuals and businesses without that kind of recognition. Marvell would have to stay on top of innovation. The company would be constantly challenged to correctly identify trends, rather than initiate them.

  • Report this Comment On August 24, 2010, at 2:34 PM, Ingalls2001 wrote:

    Yes. Chase the jobs out of the country by taxing the companies that provide the jobs. Brilliant solution.

    Heaven forbid the US take a proactive stance to taxing businesses at a level that would entice the companies to bring the jobs and tax revenue (albeit at a lower tax rate) they would generate into the US.

    There is a reason they are based in Bermuda...it is good business sense...they minimize their costs and maximize their profits.

    If you happen to run a successful business by maximizing your costs and minimizing your profits, please let me know what color the sky is in your world.

  • Report this Comment On August 24, 2010, at 9:18 PM, LTInvestorJim wrote:

    Eric --

    I like this company, and I think you could have added two other growth drivers to your write-up: gaming platforms and emerging markets.

    Regarding the opportunity with gaming platforms, consider these quotes from the latest conference call:

    "Looking at the sources of the growth [i.e. the 50% growth in mobile and wireless], it was broad-based across all our mobile and wireless product lines. Approximately 15% of the sequential increase was due to the initial production revenue from our ARMADA application processors, primarily as a result of a major customer preparing to launch a new gaming platform."

    "And lastly, about 55% of the sequential growth in mobile and wireless revenue was due to our embedded Wi-Fi products. The main drivers for Wi-Fi product growth was due to new and existing gaming systems combined with the continued product adoptions within the imaging and enterprise access markets."

    They have over 800 engineers in China developing chips for Chinese companies. They are developing chips for the TD-SCDMA cell phone standard, which is China Mobile's (CHL) protocol. CHL is the largest cell phone company in the world, from the standpoint of number of subscribers.

    http://www.marvell.com/company/news/press_detail.html?releas...

    http://www.marvell.com/company/news/press_detail.html?releas...

    Jim

    Long MRVL

  • Report this Comment On August 24, 2010, at 10:08 PM, asutin56 wrote:

    To be honest, I’m relatively new to investing, but when I’m looking at this company, I don’t see one that I would consider buying. Even though they do have a good growth rate in front of them, their average P/E over the last 10 years is -41.86. This includes -638.10 in 2007 alone. During this same time period, their EPS was also negative, -.09 was the average. Even though they are showing signs of improvement with their EPS, their previous numbers vary too much for me to want to get into this company.

  • Report this Comment On August 25, 2010, at 12:40 AM, MyunderratedLife wrote:

    Also, I think I read that TMF was going to have short picks for the 11 o' clock stock series as well - is that still the plan?

    At the risk of being presumptuous, if I do happen to receive the stock advisor promotion, would it be possible to send the contact to: nick.lee@bba07.mccombs.utexas.edu

    It's my preferred address, but the one linked to this account works now too - I just got rid of the spamblocker..

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