The phrase, "catching a falling knife" is overused for bear arguments. Whenever a company's stock price crashes and bargain hunters swoop in for the deals, investing threads are flooded with the adage. Of course, sometimes it's appropriate, but largely it is a hyperbolic statement. For Marvell Technology (NASDAQ:MRVL), the pall cast by being associated with the dying PC industry has left the company with a depressed market value that fails to accurately account for the direction of the company. While it may be unfortunate in the short term for the company's shareholders, Marvell presents an attractive buy opportunity for the far-sighted.
A history of doing just fine
Investors and analysts sometimes seem to forget that being a technology company involves a constant cycle of innovation and irrelevance. It's a fast-moving industry, and the successful players find ways over time of reinventing the company to address current and future trends. The death of the PC is a popular trope these days, and for good reason, but it has dragged down the value and image of perfectly good companies.
Of course, we can point to giants that fell behind in innovation -- Microsoft, HP, maybe Apple in five years. The thing is, it is not inherently bad to have been a major player in a technology that is being eclipsed -- as long as you keep moving forward. I believe that is what semiconductor maker Marvell is doing, while the market values it as a retiring dinosaur.
This PC-ocalypse has been in the making for at least five years (if not 10). If Marvell was to die with the PC, it would make sense for its long-term earnings growth to decline. But, over the past five years, Marvell has grown roughly 10.6% on an annualized basis. On the ever-important cash-flow front, that five-year number goes to 13.6%. The company continued making money on its product lineup for as long as it could, and now that product cycle is shifting out and making room for the next. This creates a short-term earnings (and price) dip, before the next round begins.
What's on tap
Admittedly, Marvell is coming off a tough year. On an annual basis, net income took a bath, sinking 50% to just $304 million. The top line wasn't as devastating, with revenue down just 7% over the prior year. The company ended 2012 with a lawsuit loss to Carnegie Mellon University, which alleged that Marvell infringed upon two of the school's patents. The judge ordered a $1.1 billion penalty, but analysts are quick to point out that Marvell's manufacture, distribution, and sale of products in question takes place almost exclusively outside of the United States. Hedge fund guru David Einhorn strongly believes this fee will be reduced substantially, or eliminated all together.
In Marvell's recent conference call, management pointed out the aforementioned product transition -- particularly in the growing mobile space. Marvell may not have been at the forefront of the mobile transition, but better late than never. The product switch is at its trough now, says management, and revenue should begin growing in the second quarter of this year. That alone is an argument against the the market's current valuation of the company. Marvell is targeting 10% of WCDMA smartphone market share by the end of this fiscal year, and management seems confident that goal will be reached.
Along with mobile growth comes strong expected growth in the enterprise business, and the company has an impressive presence in the solid-state drive business -- 50% of the merchant silicon market. Marvell has been and should continue to outperform on the storage business.
So the company is continuously shifting away its reliance on PCs while gaining valuable market share in the storage and mobile businesses. In the mean time, the company has a 20% free cash flow margin. It has nearly $2 billion, or 37% of its market cap, in cash. Current assets handily cover total liabilities. The company has been and continues to aggressively reduce share count, which should boost EPS in coming years along with organic growth. David Einhorn seems bullish enough to put 6% of his entire fund in the company (a recently added-to position).
All of this while the market puts it at 7.8 times trailing EV/EBITDA, and lower if you model out a year or two. For comparison, chip maker STMicroelectronics trades at 12.57 EV/EBITDA. It lost money last year, yet pays an attractive 4.3% dividend.
Intel trades cheaper than Marvell using the same metric, yet it is a company that is 25 times the size of Marvell and much more dynamic its in its business. Marvell is a relatively easy-to-understand company that has a clear growth runway ahead of it.
As always, only invest in that which you are comfortable and knowledgeable. Technology's obviously a very fast-changing industry and obsolescence is always right around the corner. Marvell looks to be handling that turn well, but investors need to keep a close eye on contract and design wins to determine if its new products are tracking with customers.