Wedbush Morgan analyst Craig Berger sent a note to clients last night initiating a hold rating for Marvell Technology (MRVL). Excerpts follow:
Initiating coverage of Marvell with a HOLD rating and $20 target. We think MRVL is fully valued relative to its 2007 and 2008 earnings power and look for 1) a cheaper stock near the $15-16 range, 2) signs of greater than expected share gains in its handset chip business, or 3) greater than expected growth in Wi-Fi, Ethernet, or hard drive chips. We greatly respect Marvell’s technology portfolio and execution track record, and look forward to recommending the shares at more reasonable valuation levels. Checks show near-term business trends remain choppy. Recent checks indicate that Marvell has not seen a ‘snap-back’ in its current business trends heading into the seasonally slower first quarter. Furthermore, checks indicate that Marvell continues to take steps to prevent its internal inventories from growing too large, another sign that demand has not materialized as expected. Operating margins are significantly depressed due to recently acquired Intel (INTC) handset chip business. Marvell’s new handset chip business is driving its operating margins down from 28.6% in April’06 to 5-6% in April’07. In order to capitalize on its large and risky investment Marvell management must: 1) win 3G chip share in a very competitive market against TI, QUALCOMM (QCOM), Broadcom (BRCM), and others, 2) reduce chip production costs, and 3) scale operating expenses. Also, there is integration risk in that corporate cultures may not blend, management may be distracted from its core business, or technology integration may be problematic. Top-line growth drivers include chips for handsets, embedded and 802.11n Wi-Fi, GbE infrastructure, and printers. Marvell’s largest growth opportunity is its baseband and applications processor segment (+20% YoY in 2007, acquired from Intel) as the firm tries to penetrate 3G markets and push its technology down into the mainstream handset models. We believe the baseband and applications processor chip markets total $12 billion per year, of which Marvell has 3-4% market share. The firm’s other 2007 growth opportunities include ramping embedded and 802.11n Wi-Fi chips (+46% YoY), driving Gigabit Ethernet chips deeper into the infrastructure market (+10% YoY Ethernet overall), and ramping printer chips (+59% YoY) for HP and other customers. Core storage business (53% of revenues) is more mature with single-digit growth likely in coming years. We believe that Marvell’s hard disk drive storage chip business is a more mature and slower growing business these days as unit growth is largely offset by ASP declines. We see incremental customer share gain opportunities largely limited to Seagate, and incremental socket share gains limited to lower content motor controllers and pre-amplifiers. While Marvell has done a great job of winning market share over the past five plus years (39% in 2006 per our estimates), many of its growth opportunities are largely exhausted. Marvell has significant competitive barriers to entry. Marvell has assembled a very broad suite of intellectual property in chip design, software, and reference platforms that drives significant barriers to entry. The firm leverages its broad suite of technology by integrating many different functional components onto a single chip, thus driving small solution footprints, low costs, high performance, and high functionality. Valuation is rich at 29x forward EPS estimate and 4.1x EV/S multiple. Shares of MRVL are trading at somewhat rich valuations, in our view. Our price target is based on a 30x multiple of our forward earnings estimate (we are using 2H’07 and 1H’08 to account for the firm’s topline growth opportunities), slightly below the firm’s four-year historical median forward P/E multiple. Our price target is also based on a 4.2x enterprise value-to-sales multiple (2007), also below the firm’s four year historical median multiple to reflect Marvell’s depressed margin structure and likely slower growth rates going forward. Risks to attainment of our share price target include: options backdating related risks, worse than expected chip demand, a slower than expected increase in handset chip operating margins, less than expected market share gains in handset or Ethernet markets, more than expected chip competition, and chip market cyclical downturns.
MRVL 1-yr chart