Even after setting a fresh 52-week low just last month, Marvell Technology (MRVL 1.80%) continues to push lower. With shares in the dumps, this is about the time when the value-minded bargain hunters come out of hibernation looking for a deal. The tough part is making sure investors don't get stuck trying to catch a falling knife.
Let's look at the good and bad. Is Marvell a value buy or value trap?
Good: David Einhorn
Few names on the Street command the level of respect that Greenlight Capital's David Einhorn does. In July, the famed value investor believed shares were ready to rebound from the depressed prices at the time. For a brief time, shares began to recover, only to be smacked down by a disappointing second-quarter earnings release, and shares now sit 15% lower than the lows it saw over the summer.
At the time, Einhorn had disclosed a substantial increase in his stake, boosting his position by over 60%. That's a big bet from one of the most reputable value investors out there. Einhorn must see something there that he likes.
Good: Valuation and cash position
Right now, Marvell is undoubtedly cheap. The company had $2.1 billion in cash and investments on the books at the end of July, representing 42% of its current market cap of $5 billion. It has also generated $629 million in free cash flow over the past twelve months. Here's how its valuation compares with some of its peers.
|
Company |
P/E (TTM) |
P/S (TTM) |
P/FCF (TTM) |
Sales Growth (TTM) |
|---|---|---|---|---|
|
Marvell |
11.4 |
1.5 |
7.8 |
(7.1%) |
|
Texas Instruments (TXN 0.58%) |
19.9 |
2.3 |
16.2 |
(5.5%) |
|
Broadcom (NASDAQ: BRCM) |
24.0 |
2.2 |
12.5 |
2.9% |
|
Qualcomm (QCOM 0.97%) |
20.2 |
5.5 |
27.8 |
33.2% |
Source: Reuters. TTM = trailing 12 months.
Of course, the shrinking top line is one reason Marvell fetches such a lower valuation, but are the company's prospects so dire as to warrant such a discount relative to its peers?
Bad: PCs
Marvell is a leader in the hard-disk drive, or HDD, controller space. The HDD industry has just recovered from the Thailand floods, but the overall PC market remains rather sluggish in the face of tablet cannibalization and anticipation of Microsoft (MSFT 1.92%) Windows 8. Declining PC unit volumes have weighed heavily on Marvell's core business, with third quarter PC shipments worldwide falling 8.3%.
On top of that, the HDD sector is facing consolidation right now, with Western Digital (WDC 7.51%) hooking up with Hitachi's storage unit and Seagate Technology (STX +0.00%) pairing up with Samsung's HDD business. Even before adjusting for the acquisition, Western Digital alone already comprised 16% of Marvell's sales through the first half of the year. Consolidation is actually bad for Marvell, since it gives its biggest customers more weight and bargaining power, which could add downward pressure on margins.
Bad: Research In Motion
As Marvell's biggest processor customer, underperformance at Research In Motion (RIMM 2.42%) is also having a negative effect on Marvell's results. Last quarter, RIM reported BlackBerry shipments fell 30% from a year ago to 7.4 million.
RIM's future rests squarely on the shoulders of its next-generation BlackBerry 10 platform. Even if this platform is relatively successful in helping the company turnaround, RIM is reportedly using Qualcomm's Snapdragon processors in BlackBerry 10 devices. There's no upside in Marvell's relationship with RIM, even if the BlackBerry maker's prospects improve.
Bad: Competition
Qualcomm is putting the heat on other parts of Marvell's business, like baseband sales in China. Marvell had enjoyed a first mover advantage with TD-SCDMA chips for China's unique 3G standard, but Qualcomm's newest chips also support that standard. Broadcom is a tough competitor in the market for Wi-Fi combo chips, even grabbing the coveted spot in Apple's iPhone several years ago.
Verdict: Value buy
At current prices, Marvell is a value buy. The valuation is simply too low to ignore with the strong cash position and free cash flow generation. I agree with Einhorn that a rebound of some magnitude does seem in order considering how far shares have fallen over the past year.
That being said, the company's future prospects remain under heavy fire, with weak PC sales and dramatically intensifying competition in mobile chips. There's a possibility that Windows 8 will boost PC sales and Marvell along with it, but Windows 8 could just as easily be a flop.
This would be a value play, pure and simple, and I'm starting an outperform CAPScall to back up my words. However, if a meaningful bounce does materialize and shares exit deep-discount territory, I would seriously consider getting out because I don't have much faith in the long-term business.
