Marvell Has Significant Upside Potential

Jun. 1.12 | About: Marvell Technology (MRVL)

I've been watching Marvell (NASDAQ:MRVL) for a while now. The price action hasn't been encouraging over the last few months, to say the least, plunging from just under $16 to just under $13. I believe, however, the stock at these levels represents an excellent entry point to start building a position. The company is fundamentally sound and its future prospects seem particularly bright.

First, let's talk valuation. At current levels, Marvell's market cap is $7.32B. The company has no debt and a healthy cash position of $2.20B. The company's P/E of 13.88 seems fairly low for a growth stock in the semiconductor business (the industry average is 28.55) and its PEG ratio of 0.97, too, seems fairly low in contrast to the industry average of 2.23. The concerns I have here are that the company's quarterly earnings growth is -35.6% and quarterly revenue growth is -0.80%, but I expect revenues and earnings to grow significantly going forward. Why?

Marvell's expanding their product lineup considerably. They make application processors, broadband chips, wired and wireless network chips, and more. An interesting and relatively new segment for Marvell is in designing widely used controllers for the incredibly high growth solid state drive segment. Intel (NASDAQ:INTC), OCZ Technology Group (NASDAQ:OCZ), and Micron (NASDAQ:MU) (among others) have used Marvell silicon in their solid state drives. Solid state drive controllers are high margin and should see healthy sales growth.

A caveat here is that as solid state drives become more popular, hard disk drive sales will fall; Marvell also supplies hard disk controller chips. It is unclear as to what degree cannibalization of hard disk drive controller sales by solid state drive sales will occur, but in the near and medium term, it seems that solid state drives are a complementary technology to hard disk drives, meaning such cannibalization should be minimal and that overall sales should improve.

Another high growth area is ARM (NASDAQ:ARMH) based application processors. Marvell is one of the few system-on-chip vendors (another big one is Qualcomm (NASDAQ:QCOM) ) that actually designs microprocessors based on the ARMv7 instruction set rather than licensing the off-the-shelf Cortex designs. This is a very fast growing, high potential market. Marvell's chips can be used in smartphones, tablets, laptops, desktops, and even servers (in fact, Dell (NASDAQ:DELL) has announced that they are building ARM based servers utilizing Marvell silicon). Of course, the two major headwinds here are the sheer number of competitors in the ARM application processor space (such as NVIDIA's (NASDAQ:NVDA) Tegra, Qualcomm's Krait, and Texas Instruments' (NYSE:TXN) OMAP) and software support in the traditionally x86 focused laptop, desktop, and server segments.

Finally, Marvell's management has increased the share buyback allocation by $500M as well as recently instituting a modest $0.24/share yearly dividend (at current prices this represents a 1.88% yield). This is a good sign for the strength of the company, and I think seeing the company buy back shares at these levels could give additional confidence to the thesis that the stock is materially undervalued here.

Disclosure: I am long OCZ, NVDA.

Additional disclosure: I may initiate a position in MRVL over the next 72 hours.