Tickers in this Article: MRVL, RIMM, BRCM, QCOM, TXN, WDC, CHL, STX, HIT
Often one of the tricks to investment success is counter-intuitive investment instincts. In the case of chip company Marvell Technology (Nasdaq:MRVL), it may seem silly to be interested in this name when its storage business is threatened by flooding that has hit its customers, and its wireless business continues to suffer as its major customers wither under competition. All of that may be true, but it ignores the facts that this company is getting more diversified, and still manages to generate attractive amounts of free cash flow. Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

A Challenging Third Quarter
Relatively few chip companies are reporting great earnings right now, and that's particularly true for those with high levels of exposure to PCs and Research In Motion (Nasdaq:RIMM). For this quarter, Marvell reported that revenue fell 1% from the year-ago level, but rose 6% on a sequential basis. The company's storage business (chips that control hard disk drives) saw 11% growth from last year and flat sequential performance, while the networking business was up 7% and also flat from the second quarter. Mobile/wireless was more mixed - down 15% from the year-ago period, but up 20% from the second quarter as the company navigates past its RIM issues.

Operating leverage is still something of an issue, however. Gross margin fell significantly from last year, and by more than a point from the second quarter. Operating income was even weaker - down 26% from the year-ago period and down 2% sequentially. While investors won't like this result, Marvell continues to invest heavily in research and development (R&D) ((up 21% from last year and 6% sequentially by non-generally accepted accounting principles (GAAP)), and that should pay off down the road as the arms race with the likes of Broadcom (Nasdaq:BRCM), Qualcomm (Nasdaq:QCOM) and Texas Instruments (NYSE:TXN) continues. (To know more about income statement, read: Understanding The Income Statement.)

The Disk Situation - Not as Bad as Feared
Marvell sells to the major hard drive manufacturers like Western Digital (NYSE:WDC), Seagate Technology (Nasdaq:STX) and Hitachi (NYSE:HIT), and the recent floods in Thailand had the Street worried about this major revenue contributor. So far, it seems that the damage won't be too bad to Marvell's financials - these manufacturers have alternate manufacturing sites available, in most cases, and will run additional shifts once the clean-up is complete to make up for lost inventory.

Can the Company Stay Strong in China?
Although the company's North American smartphone business has suffered with the travails of Research In Motion, China is another story. The company has a major share in TD smartphones and China Mobile's (NYSE:CHL) rollout has been going well. Although Qualcomm is looking to enter this market, Marvell seems to be ahead of the curve when it comes to production advantages that should allow it to keep its prices very competitive.

The Bottom Line
I write fairly often on chip stocks, so some readers are probably sick of reading about how I think a familiar group of names - Altera (Nasdaq:ALTR), Atmel (Nasdaq:ATML), Broadcom, Qualcomm, Intel (Nasdaq:INTC), etc - are interesting stocks to check out during this cyclical industry downturn.

Well, perhaps it's also time to add Marvell to this list. I don't like the company's outsized exposure to the hard drive market, and I likewise don't like the company's current competitive position in the smartphone market vis-a-vis Broadcom/Qualcomm/Texas Instruments. Still, the company is getting better (and more diversified) and it is hard to ignore the analog-like free cash flow margins that the company produces.

At today's prices, Marvell looks exceptionally cheap. There's certainly the risk that the Thai flooding situation turns out worse than management currently believes, and that competition erodes that foothold in the Chinese smartphone market, but that's the nature of investing. Here and now, this stock looks more interesting than it has in quite some time. (For additional reading, check out: A Primer On Investing In The Tech Industry.)

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At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.

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