Please ensure Javascript is enabled for purposes of website accessibility

Why Marvell Technology Group Ltd. Fell 22% on Friday

By Anders Bylund - Sep 11, 2015 at 1:19PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Disappointing preliminary results on top of internal reviews of accounting practices and bad internal communication? Ouch.

What: Shares of Marvell Technology (MRVL 2.98%) fell as much as 22% on Friday morning. Just before the opening bell, the semiconductor and software designer published preliminary second-quarter results. The results fell far short of analyst expectations, and the company also announced an internal investigation of its own accounting practices.

So what: For the second quarter, Wall Street analysts were looking for earnings of $0.11 per share on roughly $722 million in sales. Instead, the preliminary report showed a net loss of $0.74 per share on sales of $711 million. Then there's the audit committee's accounting investigation, looking at the company's financial reporting controls and potentially sloppy revenue recording practices.

Now what: The revenue shortfall in the second quarter is directly related to Marvell's accounting investigation. Among other things, the committee is looking closely at roughly 8% of this quarter's sales falling in the third quarter's reporting period. So far, the investigators led by audit committee chair Joergen Gromer haven't found any improprieties here, although the move points to weak demand for some of Marvell's storage controller products.

The greater long-term worry comes from a deep look at the senior management team's operating style. A reported lack of communication from Marvell's corner offices has led to a delay in putting this quarter's proper financial reports together, and prompted the committee to look at "whether senior management's operating style resulted in an open flow of information and communication to set an appropriate tone for an effective control environment."

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

Whether or not this investigation leads to any SEC-ordered reparations or not, this could very well be the first step toward an overhaul of Marvell's executive team. Gromer, by the way, is bringing some very appropriate experience to the table, having served as president of Tyco Electronics when that company worked through its own disastrous accounting scandal a decade ago.

I'm not saying that Marvell is the next Tyco-style scandal story, but I do smell the winds of change blowing through its Santa Clara headquarters. The stock set brand new multiyear lows on Friday, and for good reason.

Will the company climb out of this black hole? Only time will tell, as Marvell's board committee works through this tangled web to uncover the company's true operating nature. And if they decide to give current executives the boot, they'd certainly be doing it over founder, CEO, and chairman Sehat Sutardja's protests. In the meantime, one analyst called the stock "unownable." So stay tuned.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Marvell Technology Group Ltd. Stock Quote
Marvell Technology Group Ltd.
MRVL
$53.96 (2.98%) $1.56

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
322%
 
S&P 500 Returns
116%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/25/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.