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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.

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.

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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.