Chip designer Marvell Technologies (Nasdaq: MRVL) released first-quarter results last week. Non-GAAP earnings per share of $0.23 on $796 million in revenue put Wall Street's top- and bottom-line targets firmly in the rearview mirror.
But Marvell's share price didn't follow suit. A slight pop was quickly erased, and Marvell shares can be had at a 2.7% discount now. Is this a buy-in opportunity or a signal of further price drops to come?
Analysts are divided on that issue. Canaccord Genuity and Needham kept their existing "buy" ratings on the stock after the first-quarter report while Nomura stuck to a "reduce" grade, which seems like a mildly bearish variation of "hold." The bulls and the bear disagree on some very fundamental issues.
The bullish firms see strong and rising demand for Marvell's networking chips and storage controllers. In particular, increasing orders from China Mobile (NYSE: CHL) for Marvell's TD-SCDMA radio chips should keep the top line strong. That's China's largest telecom, so owning a strong position in that account should lead to millions of shipped chips. According to Marvell CEO Sehat Sutardja, the addressable market is some 650 million 2G handsets than will eventually need 3G replacements and TD-SCDMA radios.
But Nomura doesn't buy that rosy view. "One good quarter does not signify a trend," the firm noted. The growth prospects for Marvell's core markets of networking, storage, and wireless technologies look limited, and huge sales of lower-margin wireless chips could cut Marvell's gross margins. That's how Nomura gets to a $13 price target while the more optimistic firms look for roughly $20.
Nomura is absolutely correct on the limited long-term value of short-term swings, but I disagree on the firm's view of the storage and networking markets.
For one, hard-drive builders Seagate Technology (Nasdaq: STX) and Western Digital (NYSE: WDC) are bouncing off a period of very slow hard-drive volumes because of last year's flooding disaster in Thailand. Simply reaching back to the pre-flooding volumes still presents plenty of growth from the recent trough, and then the industry must fill the pent-up demand that came from several quarters of limited supply. And you're still not accounting for the Big Data trend, which will keep demand for affordable mass-storage devices for years to come.
I could tell you a similar story about exploding networking demand, and you've already seen the projected market for next-generation networking in China. In short, I'm siding with the bulls here. Marvell's markets look very healthy from here, and it's a mistake to bet against the company today.
My CAPS portfolio already holds a thumbs-up CAPScall on Marvell, or else I'd start one right now. This is no flash in the pan, but a solid player in the trillion-dollar mobile-computing revolution.
