Buying Marvell Technology After Its Recent Drop Makes Sense

Chipmaker Marvell Technology (NASDAQ: MRVL  ) fell by nearly 6% last Friday after reporting second-quarter results. The company beat consensus estimates comprehensively on both revenue and earnings, and offered decent guidance. However, some analysts are of the opinion that Marvell's networking business, which accounted for 21% of overall revenue in the previous quarter, is not in the best of health.

A closer look at Marvell's results will make it clear that all is not bad. Investors can use the recent drop to scoop up more shares of a company that has been on a terrific run this year, appreciating 70%.

Storage is strong
The storage market is Marvell's biggest. It makes up 52% of the company's overall revenue, and it has been improving steadily. Although the PC market is in a slump, Marvell's storage business has done well on the back of shipments to enterprise customers and use of hard disks for non-PC applications. Moreover, the company says it is winning market share and saw sequential enterprise shipment growth of 80% to its top North American customer.

In addition, Marvell is seeing strength in sales of its solid-state drive, or SSD, controllers, as revenue and unit shipments of SSD controllers doubled from the year-ago period. Similarly, Marvell is applying its expertise to develop low-cost solutions for hybrid drives as it expects this market to become a substantial opportunity in the future.

Marvell counts both Seagate Technology (NASDAQ: STX  ) and Western Digital (NASDAQ: WDC  ) as customers, apart from others such as Toshiba, in the storage business. Western Digital accounted for 24%of its revenue in the previous fiscal year, while Seagate has grown from being a less-than-10% customer in fiscal 2012 to having a 10% share in fiscal 2013.

Relying on Western Digital for almost one-fourth of revenue no doubt looks like a risk. The company's hard-drive shipments in the previous quarter fell to 59.9 million from 71 million in the year-ago period. But, Western Digital is seeing strength in enterprise SSDs, and this was the reason it ramped up its orders from Marvell.

Profiting from next-gen storage
In June, Western Digital announced that it would be acquiring sTec for $340 million to bolster its enterprise SSD business. According to AnandTech, STEC has more than 100 patents related to SSDs and this acquisition should further improve Western Digital's position in this market, and Marvell in turn.

In addition, during the previous conference call, Western Digital management stated that the company's non-PC business has grown from 35% of revenue to 50% in the last five years. This is yet another positive sign for Marvell since growth in non-PC related sales at its biggest customer will act as a hedge against the PC slump.

Research firm Gartner forecasts robust growth in hybrid disk drives going forward, with NAND flash usage in hybrid drives expected to increase an incredible 169 times by 2017. And this is where counting Seagate as a customer will help, since it is making efforts to penetrate this market aggressively.

Last month, Seagate introduced the Seagate Enterprise Turbo SSHD, the "industry's first enterprise-class solid-state hybrid drive (SSHD)" according to the company. The company further states that this drive will deliver three times the speed of a conventional hard drive while being twice as fast than a 2.5-inch hard drive at a slightly higher cost.

So, it is not surprising that Marvell's biggest end market grew 8% sequentially in the previous quarter even though the PC market is not in the best of health. Moreover, Marvell's mobile and wireless business is witnessing solid growth and it grew 30% on a sequential basis in the previous quarter.

Don't ignore these
Accounting for 22% of overall revenue in the previous quarter, Marvell's mobile business is growing along with important customers such as Samsung and China Mobile. According to Marvell, its 3G solution is being used by several OEMs, and Marvell is also developing its 4G LTE solution, which it expects to gain traction going forward.

So, even though Marvell experienced a slight slowdown in its networking business due to inconsistent order patterns from certain customers for passive optical networks, the long-term picture looks good. The passive optical network market is expected to grow at an annual rate of 23% until 2016, according to TechNavio, which bodes well for Marvell.

Final words
Finally, Marvell has a diversified business -- another good reason why investors should stick to the stock and not be deterred by the weakness in just one segment, which is expected to get better in the future. The trailing P/E of 27 times looks expensive, but Marvell has been turning around and investors might consider adding to their long positions after the recent drop.

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