Solid earnings from Marvell Technology (MRVL) illustrate that a transition away from hard disk drives ("HDD") to Solid State Drives ("SSD") will take many years. Prices for solid state storage are steady, limiting the demand for SSDs. Consumers are sensitive to the amount they are willing to pay for SSDs in notebooks and desktops. So long as the sweet-spot for 128GB-256GB SSDs remains in the $100-$200 level, suppliers like OCZ Technology (OCZ), Micron (MU), and SanDisk (SNDK) could be limited in growing profits at the expense of hard disk makers. Seagate (STX) and Western Digital (WDC) still offer the highest value: the cost of storage per GB is lowest. Investors value the hard disk makers at the lowest, but assign a premium to SanDisk, Marvell, and Micron. Price/Sales below 1 for Seagate and Western Digital:
Marvell Technology Group Ltd.
Micron Technology Inc.
Western Digital Corporation
Seagate Technology Public Limited Company
OCZ Technology Group, Inc.
(Data Source: Seekingalpha)
OCZ trades relatively lowest in the peer group with a Price/Sales ratio of 0.31. Shares are deeply discounted because the company has yet to file its quarterly earnings. In an update provided on January 31, the company said quarterly revenue is expected to be between $65M and $85M in each of Q2 and Q3.
Compared to other players in the storage space, Marvell shares are the worst performers over the last year. Only OCZ performed worse. SanDisk and Micron shares are flat, while hard drive markets Western Digital and Seagate are up nearly 20%:
(Data Source: Yahoo Finance)
A $1 billion patent dispute faced against Marvell created an investment opportunity for the company at the end of 2012. Upside could be limited between now and May or June 2013, when the ruling for Marvell's bid to have the post-trial motions against it overturned is expected. In the meantime, there are 6 reasons to be bullish with Marvel Technology.
1) Quarterly Earnings
Marvell generated $775 million in revenue in the fourth quarter, or earnings of $0.19 per share, on gross margins of 53.2% (non-GAAP). The company bought back 34 million in shares, and forecast the current quarter (Q1) to be the trough for the business. For the year, the company used 70% of its excess free cash flow to buy back 16% of its shares and distribute $100 million in dividends.
For the quarter, cash flow from operations was $205 million, up from $137 million in the previous quarter. Free cash flow was $161 million, compared to $113 million in the previous quarter.
In the HDD storage space, Marvell gained 5% in market share. A transition to 500-gigabyte per platter devices helped improve growth. 50% of revenue was generated from storage. In the SSD space, the business grew 40%. Marvel now has 50% of the share in the merchant silicon market.
For the fiscal year, Marvell earned $0.86 per diluted share (non-GAAP) compared to $1.27 a year-ago.
2) Quarterly Forecast
Marvell views Q1 to be seasonally weak, due to seasonality that includes a slowdown from Chinese New Year festivities. The quarter is being held back because the company is transitioning to LTE, 4G, and multi-mode 3G. Design wins support the view that Marvell is on-track to gain from these new segments in the mobile marketplace.
The company expects to generate revenue of between $700 million to $740 million. The sequential Q1 decline will be followed by a stronger Q2.
3) Patent Litigation
There is substantial upside for Marvell shares if the company successfully overturns the CMU patent litigation. The company believes that it did not infringe on the patents, saying in the conference call that the 3-channel technology was developed in-house.
4) Balance Sheet
Marvell ended the fiscal year with $1.9 billion in cash and cash equivalents. Inventory declined 23% sequentially to $250 million, while days of inventory declined to 77 days (from 81 days in the previous quarter).
The number of outstanding shares will decline to 530 million shares, which implies there is $3.58 per share in cash.
5) Potential from SSD Growth
Sales related to the SSD market contributed to around 5% of the overall market. As management mentioned in the earnings call, industry forecasts of 50% to 100% growth in SSD would benefit Marvell. More importantly, a drop in prices in this segment would be even more beneficial.
6) Strong Blackberry 10 Sales
Strong initial sales for Blackberry's (BBRY) Blackberry 10 in Canada and in the UK suggest Marvell will benefit as the new device is rolled out in the emerging markets and in the United States. Initial sales forecasts vary widely. Analysts from Cannacord Genuity and Pacific Crest both cut their forecast for handset sales through retailers, from 1.75 million units down to just 300,000. Looking beyond the current quarter, traction for Blackberry 10 should be expected to be slow but steady. There is no Apple iPhone 5 successor in the horizon, and Google's (GOOG) Nexus 5 should not be expected any time soon. Limited supply of Nexus 4 was only recently resolved, limiting the competitive pressures for Blackberry.
A decline in demand for mobile devices and storage will not impact Marvell substantially. The company can maintain margins as customers transition from 320 gigs per platter to 500 gigs. SSD adoption should be expected to be slow due to price sensitivity. Still, as the technology reaches a maturation phase, flash storage pricing will drop, driving SSD adoption. To further improve profits, Marvell also plans to limit costs as it advances the sophistication of SSD controllers. In addition, Hybrid flash-HDD solutions also make Marvell insensitive to the shifts between HDDs and SSDs. In the mobile space, shifting from dual core to quad core LTE will sustain margins as the product mix shifts from 3G.