David Einhorn is one of my favorite professional investors. His focus on fundamentally strong companies with extremely cheap valuations resonates deeply with my own investing style. When performing my due diligence on shares of Marvell (MRVL), I noted that Einhorn's Greenlight Capital owned a fairly sizable stake in the company. As shares declined in value from his purchase at the $14 level, Einhorn, in his second-quarter letter, noted that he saw the recent price decline as an opportunity to increase his stake in the $11-$12 range.
As shares have seen continued selling pressure, the question that naturally comes to mind is whether Greenlight sold out of its stake in Marvell.
Why Einhorn Sold Dell
A technology company that Einhorn owned that also seems particularly cheap is Dell (DELL). However, in Q2, he exited out of that position at a loss. While Marvell is not in the same sector as Dell, both companies are highly levered to the PC business.
The reasons given for closing the position were:
- Disappointment with non-PC growth and its inability to offset deterioration in the PC business
- Management will be using its cash position to buy its way into new segments, hurting the value proposition that the cash offered
Is Marvell on the Chopping Block?
Interestingly enough, the first reason given for the Dell exit could certainly be applied to Marvell. 47% of Marvell's sales comes from storage controllers, the majority of which are sold into drives that go into notebook and desktop PCs. Now, these drives are also sold into servers and the data center, but Seagate (STX) and Western Digital (WDC) have both made it clear at their respective investor meetings that the total available market for hard disk drives will be lower than expected in the near term.
Furthermore, Marvell's non-PC businesses are not growing at particularly encouraging rates:
- The Mobile and Wireless segment, which includes baseband and application processor platforms for mobile phones, has actually been seeing significant headwinds. The company is highly levered to the TD-SCDMA air interface, primarily found in China. While Marvell was first to truly capitalize on the opportunity here, other companies -- notably MediaTek, Spreadtrum (SPRD) and Qualcomm (QCOM) -- have begun to take share.
- The Networking segment is performing as expected, but this is the slowest growth segment of Marvell's three core businesses.
However, what saves Marvell is that its cash position of $2.1 billion and no debt, coupled with a decent dividend and a very aggressive buyback program, fits very well with Einhorn's investment thesis for the company. Unlike Dell, Marvell will keep a substantial cash balance and will primarily be returning free cash flow to investors (this value was $448 million in the trailing 12 months period).
Watch for Einhorn's Next Move
A major catalyst -- either positive or negative -- will come from seeing what Einhorn did with respect to his firm's Marvell position during Q3. If he added, then this would be a significant positive catalyst (despite this being an ineffective catalyst in the past, the valuation of the company is now in bargain-bin territory). If he held, then I suspect this would be a semi-bullish/neutral sign.
However, if Einhorn was selling during the quarter, then this could be viewed incredibly negatively. While this won't fundamentally make or break the stock in the long term, there would have to be some very good fundamental reasons for him to exit the position should he do so.
For more detailed analyses of the company, I recommend:
- My own article, "Marvell: Deep Value Or Value Trap?"
- "Marvell Technology - Don't Buy Into The Value Trap, Given Underlying Operational Weakness," by Robert Broens