With the worst of the hard drive market disruptions behind it, Marvell Technology (Nasdaq:MRVL) should be looking at much easier comps and better growth in 2012. While the stock does look somewhat undervalued amongst its semiconductor peers, investors may want to give some thought to the company's long-run growth prospects when deciding whether this is a good trade or a long-term holding.
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A Weak End to a Challenging Year
With supply issues in hard drives messing up the storage market and inventory run-downs in the Chinese wireless market, this was not going to be a strong quarter for Marvell. Revenue fell 22% on a sequential basis, as surprisingly strong networking results (down 1%) made relatively little difference against a 21% decline in mobile/wireless and a 31% decline in storage. That said, none of this was really surprising.
As a result of the steep sales declines, operating leverage worked against the company in a big way. Gross margin fell more than two points sequentially, and more than four points in the year-on-year comparison. Operating income got crushed, falling 63% sequentially, as the company maintained a very large allocation to R&D. All in all, while Marvell was a little light on gross margins, the company was generally stronger than expected at the operating income/margin lines. (For related reading, see Buying Into Corporate Research & Development.)
Near Term Looking Brighter
Business should start picking up fairly soon for Marvell. Although PC demand is not exactly robust, the resumption of a more normal hard drive environment should power a double-digit recovery in the key storage segment. Networking seems like its benefiting from share gains with Cisco (Nasdaq:CSCO), and ongoing growth in TD-CDMA smartphone demand in China should support solid results in the mobile/wireless business.
What About the Long-Term?
The long-term outlook at Marvell is what would concern me as a shareholder. The company has great share in hard drives (including 100% share in controllers for 500G drives) and serves every major vendor. Unfortunately, the hard drive market is not likely to grow all that rapidly anymore. While solid state drives should be a growth opportunity (only about 10% of SSDs have merchant controllers), Intel (Nasdaq:INTC) and Micron (Nasdaq:MU) may be more competitive than optimists believe, and LSI (NYSE:LSI) seems to be trying to build a more competitive business here.
The wireless market concerns me more. The company has had trouble getting traction for its app processors against the likes of Qualcomm (Nasdaq:QCOM) and Broadcom (Nasdaq:BRCM), and the company's large share in TD-CDMA could be vulnerable to upcoming launches from Qualcomm. While the company has coped with the decline of Research In Motion (Nasdaq:RIMM) pretty well (it used to be over 25% of its sales), I think there is some reason to be concerned about its heavy reliance on the TD-CDMA market and its relative weakness elsewhere.
The Bottom Line
Although chip stocks have enjoyed a solid general recovery, Marvell ends up looking relatively undervalued compared to many of them. Given the easier upcoming comps and the improving trends in consumer electronics overall, Marvell may well be in place to show some solid results in this next fiscal year. Although I think Marvell's long-term growth strategy needs some retooling, the near-term outlook makes this a stock worth considering. (For additional reading, check out 5 Must-Have Metrics For Value Investors.)
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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.