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Summary

  • The fine imposed on Marvell in the Carnegie Mellon lawsuit could significantly wipe out its cash balance.
  • Marvell could be pushed back and its innovation could be halted due to lack of funds.
  • Dependence on the storage market is also a big threat for Marvell.

Marvell Technology (NASDAQ:MRVL), which makes chips that are used in storage drives and mobile, has outperformed the market this year with gains of almost 15%. Marvell has witnessed terrific growth in revenue and earnings in the past few quarters, propelling the share price close to 52-week highs. In addition, Marvell's dividend of 1.50% has been an added attraction for investors so far. But all this goodness could disappear pretty soon.

A big blow

Marvell has been engaged in a legal battle with Carnegie Mellon University for the past couple of years, and recently, a ruling went against the chipmaker. Carnegie Mellon had accused Marvell of infringing on two of its hard-disk drive patents, and had won an initial verdict of $1.17 billion in damages in December 2012. However, a federal judge has now ordered Marvell to pay nearly $1.54 billion, almost a third more than the previous award.

As reported by Reuters -

In her decision late Monday, U.S. District Judge Nora Barry Fischer in Pittsburgh, where Carnegie Mellon is based, said "enhanced damages" were justified against Marvell and its Marvell Semiconductor unit because the university showed that they deliberately copied its patents through "known willful infringement.

The payout is equal to 1.23 times the sum of the original $1.17 billion jury verdict from December 2012, plus $79.6 million for alleged infringements that the jury did not consider because it had lacked recent financial information at the time.

Although Marvell still plans to appeal against this ruling, given that the company has found itself on the receiving end twice, it might be running out of options. A $1.54 billion charge would significantly erase Marvell's cash balance of $1.97 billion and force the company to scale back expansion plans and cut the dividend.

How this will hurt?

At present, Marvell is investing in advanced technologies to drive its business. Marvell relies on its ability to develop and introduce new and enhanced products in a timely and cost effective manner, and the adoption of those products in the market. But, Marvell is struggling to compete in products and prices in an intensely competitive industry due to uncertain economic conditions.

In addition, Marvell relies on its storage business for growth. Marvell's storage business performed strongly last year and grew approximately 13% from the previous year owing to the strong growth in its SSD business and continued share gains in HDDs. However, Marvell saw a year over year decline in the overall HDD market.

The HDD business has done well due to share gains and increased demand from customers. Customer orders were stronger-than-expected toward the end of the quarter last year as a result of the Chinese New Year and stabilization in the global PC market. But this positivity might not last for long.

Now as the PC market is declining, Marvell's prospects in the PC market could diminish further. As reported by Computerworld -

Shipments of new personal computers, most of them equipped with Microsoft Windows, will decline more in 2014 than thought a few months ago, researcher IDC said Tuesday.

IDC said that PC shipments will drop by 6% from the year before to approximately 296 million, a smaller number than it forecast three months ago, when it said global shipments would decline 4% in 2014.

In addition, IDC also projects that annual shipments will remain below the 300-million mark till 2018.

Conclusion

Thus, Marvell is under siege from different angles, which makes the stock a risky buy at an expensive 25 times earnings. Marvell's earnings are expected to grow at just 11% annually for the next five years, and due to the fine imposed by the federal court, this forecast could decrease as Marvell would find itself short of cash. In addition, Marvell's PEG ratio of 1.26 also indicates that the stock is overvalued.

Considering all of the factors above, I think it is high time for investors to exit their Marvell positions as the stock might not be able to continue its solid run going forward.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.