Friday October 21, 2011
by Paul McWilliams, editor Next Inning
As has been widely reported, the flooding in Thailand has significantly impacted the hard disk drive (HDD) market and with it suppliers like Marvell Technology Group (MRVL).
MRVL is the worldwide market leader in the HDD controller market and has forecast that it would expand its market share this year from about 60% to about 70%.
While shortages of HDD manufacturing capacity will likely drive HDD prices up and lessen the impact on HDD manufacturers, lower unit volume will clearly have a negative impact on MRVL.
I was hoping that we would get enough information from the scheduled quarterly reports provided by Western Digital (WDC) and Seagate Technology (STX) this week to be able to quantify the situation, and with that reasonably forecast the impact on MRVL.
However, given the depth of the problems throughout out the supply channel, I don't think anyone has enough information to provide a meaningful forecast.
While it appears STX's facility is "operational," and WDC forecasts a prolonged shutdown, the complexities go much deeper into the various component and subassembly suppliers that have also suffered from the flooding.
Some analysts have provided forecasts as to how this will roll through and impact MRVL's revenue and earnings.
However, given that neither STX nor WDC believe they have enough data to forecast calendar Q4 with any certainty, I would rather not tether our thinking to a specific number that is little more than a wild guess based on a huge stack of assumptions.
That said, the impact to MRVL's January 2012 ending quarter will most likely be material, and there's a reasonable chance shipments will be lighter than they otherwise would be in MRVL's April quarter. However, as I see it, that thinking is more than fully priced into MRVL's stock.
Ahead of the Thai floods MRVL was scrambling to build a new base with investors that had just begun to warm up to its growth story.
While it took longer to develop than expected, MRVL has in fact nailed the majority of the new smartphone designs in the first wave of the emerging $100 Chinese smartphone market.
Actually, to a great extent, MRVL innovated and enabled the market. However, given the risk adverse nature of the market and the fact MRVL's base was still fragile, the easy call on Wall Street was to point to the worst case and run.
We saw already seen a a wave of that selling and we may see more waves before calm and rational thought returns.
Bottom Line: Based on what I view as the most likely scenarios, I think MRVL has been oversold. I think Wall Street is far too focused on near term risks and totally ignoring the upside potentials MRVL is positioned to deliver outside the HDD market.
I most certainly don't want to suggest the price can't go lower - it can and it might.
However, if I'm right in my broader assessment of where MRVL is going, and the earnings leverage it will develop as it goes there, in the longer term the price is likely to move higher -- possibly much higher.
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