At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." While the pinstripe-and-wingtip crowd is entitled to its opinions, we've got some pretty sharp stock pickers down here on Main Street, too. (And we're not always impressed with how Wall Street does its job.)
Given this, perhaps we shouldn't be giving virtual ink to "news" of analyst upgrades and downgrades. And we wouldn't -- if that were all we were doing. Fortunately, in "This Just In," we don't simply tell you what the analysts said. We also show you whether they know what they're talking about.
Mooning over Marvell
It's looking like it's going to be a rough day for Marvell Technology (MRVL 1.55%) shareholders, as the fallout from this week's historic(ally large) patent infringement verdict continues to weigh on the stock.
As you've probably heard by now, Carnegie Mellon University just won a $1.2 billion case against Marvell, in which it alleged (and a jury found) that Marvell had infringed Carnegie patents covering "a specific technique related to read channel detector technology." Worse, the jury found that Marvell had conducted its infringement "willfully," leading some commentators to speculate that the judge in this case could award triple damages to the university -- $3.5 billion in all.
That's obviously bad news for Marvell, which doesn't actually have $3.5 billion handy. (It does have $2 billion in the bank, and no debt, so could probably handle the smaller verdict.) Nor has Marvell yet reserved any funds against the possibility that it will have to pay the verdict -- which it is appealing. Given the risks, analysts at JMP Securities decided that discretion is the better part of valor today, and downgraded the shares to market perform.
Do the rewards justify the risks?
Good question. Factor Marvell's cash hoard into its valuation, and this stock is selling for an ex-cash P/E ratio of less than 6 -- not bad for a stock that pays a 2.9% dividend yield, and is expected to grow its earnings at nearly 8% per year over the next half decade. The more so when you remember that Marvell is even cheaper than it looks, inasmuch as it generates half-again as much free cash flow ($518 million over the past 12 months) as it reports as "GAAP" earnings. Looked at that way, the stock's arguably trading for an enterprise value less than four times annual free cash flow.
On the other hand, if Marvell does ultimately have to ante up the full treble-damage verdict, that sum would all but wipe out the company's market cap. What is the risk of that happening?
Personally, I see the risk as slim. Consider: In a press release on the verdict today, Marvell observed that the processes Carnegie alleges it is infringing upon are "not practiced by any Marvell chips." To the contrary, Marvell argues that "the theoretical methods described in [the Carnegie] patents cannot practically be built in silicon even using the most advanced techniques available today."
So basically, Marvell is saying that not only did it never infringe on Marvell's patents. It could not infringe upon them, because they don't work in practice. Whether or not the technology that Marvell does use today infringes on Carnegie's ideas, therefore, it seems unlikely that Marvell could have "willfully" done something that it says it never thought was even possible to do in the first place.
Foolish takeaway
Even if you disagree with that argument, though, the fact remains: Marvell has $2 billion in cash today. That will pay for a lot of billable hours, as the company drags out this case in the appeals process. Even if Marvell does not immediately prevail upon appeal, I suspect the company will ultimately end up settling with Carnegie for a sum lower than the original $1.2 billion verdict, and much lower than the $3.5 billion treble-damages award.
Such an outcome would likely leave the stock selling at a discount, and make it a bargain despite this week's bad news, and despite this morning's downgrade. Some investors might be inclined to short the stock, or perhaps to buy a rival like LSI Corporation (NYSE: LSI), STMicroelectronics (STM 5.40%), or Texas Instruments (TXN 5.64%), on the theory that a Marvell preoccupied with its court case and burdened by lawyers' bills will be hobbled and unable to compete effectively.
Me, I still think Marvell itself is the best bargain out there -- and thanks to this week's news, it's now 15% cheaper than you would have had to pay for it a week ago. That's why I've recommended it publicly on Motley Fool CAPS, and that's why I stand by the stock still.
