Has Marvell Technology Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Marvell Technology (NASDAQ: MRVL  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Marvell Technology.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-year annual revenue growth > 15%

1.8%

Fail

 

1-year revenue growth > 12%

(6.6%)

Fail

Margins

Gross margin > 35%

53%

Pass

 

Net margin > 15%

9.7%

Fail

Balance sheet

Debt to equity < 50%

0%

Pass

 

Current ratio > 1.3

4.25

Pass

Opportunities

Return on equity > 15%

6.5%

Fail

Valuation

Normalized P/E < 20

30.91

Fail

Dividends

Current yield > 2%

2.2%

Pass

 

5-year dividend growth > 10%

NM

NM

       
 

Total score

 

4 out of 9

Source: S&P Capital IQ. NM = not meaningful; Marvell paid its first dividend in June 2012. Total score = number of passes.

Since we looked at Marvell Technology last year, the company hasn't been able to regain any ground from the four-point drop it suffered from 2011 to 2012. The stock has also performed badly, falling 30% over the past year.

One big reason for Marvell's decline has been the general weakness of the PC industry. Marvell was somewhat slow to adapt to the growing mobile market, but unlike some of its larger rivals that remain mired in the dying PC world, Marvell has actually taken steps to make the transition toward more forward-looking businesses, including mobile chips and solid-state drives.

One area where Marvell is aiming is in emerging markets. Its new quad-core processor and integrated communications chip is well-suited for the low-cost smartphones and tablets that dominate the market there.

Marvell faces plenty of competition. Qualcomm (NASDAQ: QCOM  ) won business away from Marvell by taking over its place as primary chip provider for BlackBerry, and NVIDIA (NASDAQ: NVDA  ) is fighting hard to push its Tegra line and other chips into mobile devices worldwide as well. Yet with hundreds of millions of smartphones in the $100 range expected to sell in the next year, Marvell just needs to get a reasonably sized slice of a big pie.

To improve, Marvell needs to get past its recent patent setback, in which Carnegie Mellon University successfully sued the company to win a $1.17 billion judgment, and get its revenue moving back in the right direction. Instituting a new dividend last summer was good for shareholders, but to achieve perfection, Marvell needs to produce the growth necessarily to keep rewarding investors for the long haul.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

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Click here to add Marvell Technology to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.


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  • Report this Comment On March 26, 2013, at 9:12 AM, rsinj wrote:

    This article regarding Marvell solidifies the fact that your "Perfect Stock" articles are nothing more than trailing indicators talking about the past and not the present or future.

    Go look at the stock chart at the time of your March 2011 article when it had the 8 out of 10 rating. It was after the peak and just before the big drop came.

    So, thanks for proving these articles contain little value unless you base the future on what you've seen in the recent past. And we all know the disclaimer everyone puts on that statement.

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