With the smartphones and tablets making a revolutionary impact on consumer electronics, the semiconductors industry becomes increasingly exciting to follow. I have earlier argued that Intel (INTC) is an exception in the industry, as it provides for a strong and safe investment. I have also argued that Micron Technology (MU) shareholders would benefit from exiting the DRAM business, but this may never occur. One company that also remains undervalued in this field is Marvell Technology (MRVL), which has a dominant position in single-chip TD smartphone solutions.
On the operational side, Marvell is experiencing strong secular growth driven by Chinese demand and its leading edge in chipsets. The firm has an integrated baseband + apps processor unit that continues to drive demand. At the Q2 earnings call, CEO Sehat Sutardja noted:
Today, we reported second quarter fiscal 2012 revenues of approximately $898 million, reflecting a 12% sequential increase from the prior quarter. We delivered non-GAAP gross margin of 58.1%, non-GAAP operating margin of 26% and non-GAAP earnings per share of $0.38. We generated free cash flow of approximately $235 million equivalent to a 26% free cash flow margin.
Our revenue results were at the high-end of our guidance range, and we continue to deliver strong profitability and cash flow generations driven by revenue and share growth in all of our served end markets. The key message that I want to give you today is that Marvell is executing well on all of its new product initiatives, which will increase our market share and contribute to our growth.
Mobile and wireless end markets, representing 26% of sales, continue to impress with 18% sequential growth in the second quarter. Having co-developed TD-SCDMA, Marvell has nearly an 80% market share in TD smartphones and will likely continue to be the leading provider here. Marvell now has a solid customer base with orders from Motorola (MSI), Huawei, Samsung, Sony-Ericsson (SNE), Research in Motion (RIMM), ZTE, Sharp, among several others. A recent improvement of download speed from 1.6 Mbps to 8.4 Mbps will help to further maintain the company's dominance. I model developments in the TD market adding upwards of $270M in sales in 2012 as overall revenue declines nominally by 0.3%.
These figures are further complemented by management's commitment to returning free cash flow to shareholders. The fabless semiconductor provider recently increased its share repurchase program by $500M to $1.5B, which represents a staggering 17.3% of the current market capitalization. Although the company does not currently offer dividend distributions, it may in the near future, partially depending on success of 3G handsets. The 3G handsets are being developed for Android and will help target Europe, Asia, and South America. Given the strong demand, I believe Marvell will hold up well in these areas despite macro headwinds.
Another exciting catalyst for Marvell exists in the PON market where EPON and GPON standards are being integrated. At the same time, the company is gaining market share in networking, which grew by 3% in the third quarter while remaining flat for the overall market. I expect strong double-digit growth in TD and PON to aid sales in this segment.
Overall, I forecast revenue declining by 0.3% to $3.6B in 2012 and then increasing by a CAGR of 12.5% in the following two years. Consensus estimates for EPS are that it will decline by 12.2% to $1.44 in 2012 and then increase by 6.3% and 24.2% in the next two years. Given that the company trades attractively at 11.5x and 9.4x past and forward earnings, respectively, I find that it is undervalued on a multiples basis compared overall with competitors Intel (INTC), Broadcom (BRCM), Standard Microsystems (SMSC), and Texas Instruments (TXN). Analysts currently rate the stock between a "buy" and a "strong buy".