Marvell Technology: A value story

by Paul McWilliams, editor Next Inning

I think the critical market factors that are needed to drive growth at Marvell Technology Group (MRVL) in 2012 will materialize and be solid throughout the year.

If I'm right in this assessment, I think Wall Street will wake up to the value of the story sometime during the next six to 12 months.

The company entered this fiscal year with roughly 60% market share for HDD controller chips.  And as expected, the vast Hard Disk Drive (HDD) manufacturing industry in Thailand was heavily damaged by flooding.

Still, the firm reported fiscal Q3 2012 (ended October 2011) revenue of $950.4M with non-GAAP earnings of $0.40. Both cleared the consensus estimates.

Many pundits have suggested the shortage of HDDs, which has led to notably higher HDD prices, will accelerate the adoption of Solid State Drives (SSD), which utilize NAND Flash semiconductor memory chips.

This is good news for MRVL. While I still can't quantify it, MRVL reiterated it has even higher market share in merchant SSD controller market than it has for HDD controllers.

It is important to note here SSD controller technology is very complex. MRVL began work on SSD controllers roughly eight years ago and is well prepared for this coming transition to SSD technology.

While there is no shortage of competitors, few if any can match MRVL's prowess in this technology and MRVL even noted some SSD manufacturers have switched from in-house solutions to MRVL controller technology.

My thesis for MRVL in the smartphone market remains simple. I believe MRVL will emerge not only as the leader in low-cost smartphone designs, but in reality be the primary catalyst for opening the unsubsidized $100 and lower smartphone market in emerging economies.

This is a very big deal. The big seller in emerging markets has been the feature phone. In other words, emerging markets are about where we were in the U.S. five or so years ago.

There are two primary reasons why emerging markets have trailed the U.S. in the adoption of smartphones and even today represent only a very small percentage of aggregate smartphone sales.

First is the fact emerging markets were slow to move to higher bandwidth 3G standards. But this has changed rapidly. For example, China Mobile, by far the largest wireless carrier in the world, has already installed roughly 200,000 3G TD-SCDMA towers.

This means 2012 will be the year China Mobile transitions its vast customer base from 2G to 3G. MRVL is by far the leader in chips for TD-SCDMA smartphones.

The second factor has been price. Until very recently smartphones sold for roughly $600 in these markets versus a nominal price of about $50 to $60 for feature phones.

The new smartphones using MRVL's chips sell today for only $100 unsubsidized. Going forward MRVL has a very clear roadmap that will drive this price down to about $70 in a year or so.

With MRVL doing so well the obvious question is; "Why in the heck does the stock trade for such a low valuation multiple?"

At even its recent high of $15.17 MRVL was trading at only 8.3 times the fiscal 2013 (ends January 2013) consensus plus my estimate balance sheet value (estimated balance sheet value noted below).

There are three answers for this question. One is the fact there was a "gap" in MRVL's revenue pattern caused primarily by the fact business with Research in Motion declined before MRVL was positioned to offset the decline with other designs.

Second is the fact MRVL still has high relative and absolute exposure to the HDD market.

Third is the fact MRVL has historically not been good at communicating its strategy and establishing reasonable expectations with investors.

As I see it these three factors that have weighed on MRVL's valuation are fading rapidly.

As to valuation, I believe MRVL will begin producing year-over-year revenue growth starting in fiscal Q1 2013 (the quarter ending April 2012).

Further, I believe MRVL's revenue will notably accelerate from there and for the full fiscal year 2013 (ends January 2013); MRVL will report non-GAAP earnings between $1.60 and $1.70. This is substantially above the current consensus of $1.37.

In an effort to maintain a conservative outlook for MRVL, in our valuation model I'm using a range of fiscal 2013 non-GAAP earnings that extends from the $1.37 consensus to the low side of my forecast ($1.60).

When combining this will a range of valuation multiples running from 14 to 16, and adding in the estimated balance sheet value of $3.85, this produces an estimated fair value range that runs from $23.03 to $29.45.



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