Marvell Technology - Don't Buy Into The Value Trap, Given Underlying Operational Weakness

| About: Marvell Technology (MRVL)

Shares of Marvell Technology (MRVL), the fabless semiconductor provider of application-specific products, fell over 14% in Friday's trading session. The company reported a weak set of second quarter results for its fiscal year of 2013. Furthermore, the company issued a weak guidance for the current third quarter.

Second Quarter Results

Marvell Technology reported second quarter revenues of $816 million. Revenues were up 2% from the first quarter, but are down 9% compared to the second quarter last year. On average, analysts were expecting the company to report revenues of $852.8 million.

GAAP net income fell to $93 million, or $0.16 per share. Earnings are down compared to first quarter earnings of $95 million, and last year's second quarter earnings of $192 million. Non-GAAP earnings per share came in at $0.24, below analysts consensus of $0.26.

During the second quarter, Marvell repurchased approximately 20 million of its own shares at a total costs of $250 million. Over the past two years, the company repurchased 127 million shares, almost a fifth of its shares outstanding.

Marvell attributed the disappointing results to lower volumes at its North American cellular market and a slowdown in the market for Chinese smartphones. Besides the weakness in mobile markets, storage markets were affected as well from a slowdown in the economy.

CEO and Chairman Sehat Sutardja commented on the results, "Our results in the second quarter were affected primarily by the slowdown in the macro-economic environment that impacted our storage and mobile end market. Despite the soft near-term demand environment, we are maintaining good profitability and continue to deliver shareholder value through our share repurchase and dividend programs."


For the current third quarter, Marvell anticipates non-GAAP earnings per share to come in between $0.22-$0.26. This outlook comes as a major disappointment to analysts, who expected the company to guide for non-GAAP earnings of $0.32 per share.

Sales are expected to come in between $800-$850 million, well below analysts forecasts of $913 million. The 1% growth in sequential revenues is well below the normal level, given the seasonality effects.

The mobile and wireless markets are expected to decline by mid-single digit percentages over the sequential quarter.


Marvell Technology ended its second quarter with $2.13 billion in cash, equivalents and short term investments. It operates without any meaningful debt position, leaving a net cash position around $2.1 billion. For the first six months of 2012, the company reported revenues of $1.61 billion. It net earned $187.6 million, or $0.32 per diluted share.

At this pace the company is on track to report annual revenues around $3.2 billion, on which it is expected to earn $350-$400 million. The market values the company at merely $5.9 billion after Friday's drop. This values the operating assets of the firm at $3.8 billion. The valuation implies a valuation of 1.2 times annual revenues and 10 times earnings. Other competitors trade at premium valuation levels. NVIDIA (NVDA) is valued at 2.3 times annual revenues and Broadcom (BRCM) at 2.5 times. These competitors trade at 19 and 26 times annual trailing earnings, respectively.

Currently, Marvell Technology pays a quarterly dividend of $0.06, for an annual dividend yield of 2.3%.

Investment Thesis

Year to date, shares of Marvell Technology trade with losses of 24%. Shares were off to a good start in the first months of the year and peaked around $17 by February. From that point in time shares kept steadily falling after the company issued a weak quarterly outlook. Furthermore, the worries about a general slowdown in the economy weight on shares. Currently, shares trade near the lows of the year at $10.5, despite the fact that the profitable business has a net cash position of roughly $4 per share.

Over the past years, the company hardly managed to expand revenues. At the same time profitability has come under pressure, as competition increased and key markets experienced structural slowdowns. To ease pain for shareholders, the company has repurchased a fifth of its shares outstanding and initiated a quarterly dividend of $0.06 per share.

Over the past five years, shares have roughly lost a third of their value. Shares traded within a wide $6-$22 trading range, and are rapidly approaching the lower end of that range again. While the massive cash balances offer a margin of safety for investors, I don't consider the shares a screaming buy, given the structural issues the company is facing.

While the company has a rock solid balance sheet, and a modest valuation, I remain on the sidelines. I would like to see an improved guidance and operating performance before considering a long position.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.