Despite Legal Troubles, Marvell Looks Interesting

Marvell Technology Group (NASDAQ: MRVL  ) is a very peculiar name in the semiconductor space. On one hand, it is tough to not be impressed with the sheer breadth of its product offerings, which span everything from hard-disk drive controllers to high-performance network processing units. While Marvell would seem to be the perfect chip vendor on the surface, there have been a number of pressures over the last year, including the loss of a major legal battle that could cost the company $1.17 billion. Things haven't exactly gone swimmingly for Marvell, but at current prices, the stock looks very interesting.

The good is pretty good
Within Marvell's three major operating segments -- networking, storage, and mobile and wireless -- it is clear that the company's execution is top-notch. Despite a weak total addressable market, Marvell has been able to grow its share in hard-disk drive controllers while participating in the flash-storage growth wave. While the storage semiconductor business isn't exactly a growth bonanza when the majority of the division's revenues come from hard disks, there's nothing wrong with a stable cash cow (although I wouldn't be surprised to see LSI start reversing some of Marvell's share gains in hard disks over the next 12-18 months).

The company's mobile and wireless business, which involves selling connectivity combo chips and integrated smartphone apps processors, is also getting particularly interesting. While this is a lower-margin division than either storage or networking, it is far and away the revenue growth story for the company. A dual-core, integrated 3G solution is shipping with multiple Tier 1 OEMs in China today, and its 4G LTE solution is apparently on track for certification by the end of 2013, which means revenue by early 2014. The cellular story at Marvell -- a sore spot for quite some time --- is finally getting good. It also doesn't hurt that the firm is gaining share in combo chips, a notable example being Microsoft's Xbox One.

Is the bad pretty bad?
There are two things that likely keep investors from being much more bullish on the company. First, although management claims share gains in networking, Broadcom (NASDAQ: BRCM  ) and Freescale (NYSE: FSL  ) saw their networking revenues grow by roughly 6.7% and 5.6% year over year, respectively, while Marvell's revenues here dropped by 5.5%. Despite the encouraging 20% sequential revenue growth in network processing units in the most recent quarter, it will be important for investors to watch what the trends look like in the coming quarter to determine if Marvell is really gaining share here.

The big story that weighs down the stock is the recent patent lawsuit loss to Carnegie Mellon University. The claim that Carnegie Mellon levied against Marvell was that the company willfully infringed upon a number of key patents with its hard-disk drive controller technology. Marvell lost the initial trial, subsequently moved to have the ruling overturned, only to be smacked down by U.S. District Judge Nora Fischer.

While fears that the damages would be tripled are now largely assuaged, the real question is whether Marvell's intent to appeal this to the federal courts will do much to change things. Will Marvell eventually reach a settlement with the university? Will the federal courts rule in Marvell's favor? There's a lot of uncertainty here, and the last thing Wall Street likes is uncertainty.

Despite woes, still bullish
While the problems weighing down the stock are very real, it seems that the pessimism is baked in. The investment community now seems to be expecting Marvell to have to cough up the $1.17 billion, so if this were to change, that could drive meaningful upside to the shares. However, in addition to the potential relief of this massive overhang, I also expect the firm's mobile and wireless business to help revive the top-line growth story that has been dead at Marvell for the last few years. Networking and storage upside would be nice, too, although I'm not going to go too wild with the optimism just yet.

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