Marvell Technology - Solid Business Momentum Continues

| About: Marvell Technology (MRVL)
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Marvell continues to show solid momentum, posting impressive year-on-year growth.

As settlement overhang is disappearing, investors look to future growth areas.

Yet valuation is a bit stretched as earnings are "inflated" due to non-sustainable tax returns.

Marvell Technology (NASDAQ:MRVL) released an earnings report and outlook which beat estimates, yet shares witnessed a correction following the release.

I like Marvell's long term outlook, but will await a potential correction before considering making a move.

First Quarter Headlines

Marvell technology reported first quarter revenues of $957.8 million which were up 30.4% on the year before.

The company reported net earnings of $99.5 million compared to just $53.2 million the year before as earnings per diluted share rose by eight cents to $0.19 per share.

The popular non-GAAP earnings metric came in at $0.27 per share, with the difference between both earnings metrics largely the result of share-based compensation expenses.

Looking Into The Performance

Of course a 30.4% increase in topline results is very encouraging, while revenues rose by just 3% on a sequential basis.

Gross margins were under a bit of pressure despite topline growth. Margins came in at 48.4% of sales. This was down 40 basis points on a sequential basis, and down 590 basis points compared to last year.

The company continues to spend great amount of cash on research and development efforts with nearly 31 cents of each dollar on revenue being spent on future growth.

Take notice, operating income is falling on a sequential basis as reported earnings of $99.5 million are "inflated" through a $4.6 million benefit from income taxes instead of a provision.

Outlook For The Current Second Quarter

Marvell forecasts second quarter revenues of $940 to $980 million, roughly similar to revenues reported in the first quarter at the midpoint of the guidance.

GAAP gross margins are anticipated around 49.7% plus or minus a percent. GAAP operating expenses are forecasted around $365 million which should result in GAAP earnings of $0.19 to $0.23 per share. Non-GAAP earnings are seen between $0.26 and $0.30 per share.

The second quarter guidance compares favorably to consensus estimates of revenues of $930.1 million and earnings of $0.26 per share on a non-GAAP basis.

Marvell's Rock Solid Balance Sheet

Marvell holds roughly $2.15 billion in cash and equivalents. The company does not have any debt outstanding, resulting in a solid net cash position.

The cash position represents nearly 30% of Marvell's market capitalization at $15 per share as the company still has to pay damages to the Carnegie Mellon University after infringing on its hard-disk drive patents. The latest federal order calls for a $1.54 billion payment to be made by the company, although the company can likely settle for much less.

In the meantime, Marvell continues to pay a modest $0.06 quarterly dividend, thereby providing investors with a 1.5% dividend yield. Given the potential payment related to infringement, Marvell has not repurchased any shares over the past quarter. In fact, share-based compensation resulted in 2% dilution over the past year.

Continued Growth

Marvell continues to show impressive growth as the market has moved on after the Carnegie infringement battle.

Continued demand from mobile, wireless and storage solutions drives demand for Marvell's micro processors architecture and signal processing. With major consumers switching to LTE, Marvell is enjoying solid momentum despite the fact that solid state disk customers like Seagate Technology (NASDAQ:STX) appear to have lost momentum recently.

Growth is likely to continue with Marvell's solutions focusing on growth areas like the "Internet of Things", cloud computing and in-home digital entertainment. That being said the valuation is not that appealing.

A one billion settlement could push cash balances to just over a billion, valuing operating assets at $6.5 billion. This would value the company at 16 times earnings at the current run rate, aided by strong momentum. But note that these earnings rely on a tax release instead of a statutory tax provision.

I remain cautious, but would be a buyer on significant dips towards $12-$13 per share.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.