Marvell – Unicorn Of The Chip Space?

By Stephen D. Simpson, CFA | August 23, 2013 AAA

Reading sell-side research on Marvell (Nasdaq:MRVL), you might come away not thinking too highly of the company or its decisions to grow the business in areas like Chinese mobile and wireless. On the other hand, look at the company's actual market share gains, financial performance, and the market's opinion on the company and you come away with a much different opinion. So far, the bulls in that argument are winning the day, as Marvell has been outperforming names like Qualcomm (Nasdaq:QCOM), Broadcom (Nasdaq:BRCM), and Nvidia (Nasdaq:NVDA).

Behold! – The Rare Beat And Raise
Marvell managed to do what so few other chip companies have done recently, particularly those with hefty exposure to wireless and mobile devices – the company beat estimates for the quarter and raised guidance.

Revenue was down 1% from the year-ago period, but up 10% sequentially and and about 2% ahead of sell-side targets. Storage revenue growth fueled the upside, as 10%/8% growth was well ahead of expectations, with Marvell seeing good SSD growth (up double-digits sequentially) and better demand in non-PC applications. Mobile/wireless was basically on target, down 20%/up 31%, while networking was a little weak (down 7%/down 4%). The latter is not too surprising given the recent update from Cisco (Nasdaq:CSCO).

Margins also came in ahead of expectations, helped by the larger proportion of higher-margin storage revenue. Gross margin was down 60bp from last year and 160bp from the prior quarter, but that was still a half-point better than expected. Likewise, while operating income was down 22%/up 23%, that was nearly 10% better than the Street expected.

On the guidance front, Marvell management lifted the midpoint of its revenue range to $875 million – more than 3% above the prior Street estimate. Gross margin was revised down (about one point) because of the higher proportion of wireless, but the operating margin looks a little better and the bottom-line EPS target was a penny higher. It's not a huge beat-and-raise, I'll grant, but it's better than what Broadcom and Nvidia had to offer.

SEE: Earnings: Quality Means Everything

Are Marvell's Share Gains Underappreciated?
Relative to prior sell-side expectations, Marvell seems to be outperforming in multiple businesses. The company seems to be taking share from LSI (NYSE: LSI) in SSD controllers (including a recent win in Apple's (Nasdaq:AAPL) new MacBook Air, where LSI had supplied prior generations) and holds more than two-thirds of the hard drive controller market.

Wireless, too, appears to be going well. Calibrating the guidance and comments from Samsung, Marvell, and Broadcom, it looks like Marvell has been winning sockets at Samsung. At the same time, it looks as though Marvell is gaining connectivity share in China from Qualcomm and Broadcom.

On a long-term basis, I'm very curious to see how this works out for the company. On one hand, Marvell seems to be well-positioned for the mid-range smartphone market, and that's looking like a business with real growth potential. On the other hand, a bigger wireless business means smaller gross margins and I do still worry about pressure from Spreadtrum and MediaTek.

The Bottom Line
A lot seems to be going pretty well for Marvell right now. LSI can't make much headway in HDD controllers, and now it sounds as though Marvell is upping its game in the faster-growing SSD business as well. In wireless, margins are a worry, but it's looking more as though Marvell has a better approach than Qualcomm or Broadcom for the mid-range market. In addition, the company should get a boost (albeit an expected one) from new gaming systems from Sony (NYSE:SNE) and Microsoft (Nasdaq:MSFT) later this year.

I don't feel like I'm giving Marvell all that much credit, and the shares still seem undervalued. I've bumped up the revenue growth rate to about 4%, but the long-term free cash flow growth rate is only about 3% and that still suggests fair value of over $16 per share. If the company can convince the Street that it can come out ahead in the growth-versus-margin wireless tug-of-war, these shares could continue to do well.

Disclosure – At the time of writing, the author did not own shares of any company mentioned in this article.

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