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Marvell Can Make You Money

Posted on Monday, Mar 24th 2008

Chip stocks have all been beaten up. We’ve looked at several money-making opportunities in the carnage. Broadcom looks even more like a Bargain at under $17. Qualcomm still shows headroom at $38.27. Interdigital is a funny company that could make you beaucoup money. So what about Marvell?

On March 6, Marvell Technology Group Ltd. (NASDAQ: MRVL) reported its results for Q4 and fiscal year 2008. Earlier coverage is available here and here.

Net revenue for Q4 2008 went up 36% y-o-y and 11% sequentially to $845 million driven by strong demand for its system-on-chip, enterprise-class communication, and cellular products. GAAP net income was $1.3 million, or $0.00 per share (diluted), compared with GAAP net loss of $140.6 million, or $0.24 per share (diluted) last year and GAAP net loss of $6.4 million, or $0.01 per share (diluted) last quarter. Non-GAAP net income increased 495% y-o-y and 43% q-o-q to $122.9 million, or $0.20 per share (diluted) mainly driven by better than expected revenue growth of storage and Ethernet connectivity products.

For the full fiscal year 2008, net revenue went up 29% to $2.895 billion, driven by sales of cellular and wireless communications products. GAAP net loss was $114.4 million or $0.19 per share (diluted) compared with GAAP net loss of $12.1 million or $0.02 per share (diluted) last year. Non-GAAP net income declined 22% to $280.1 million, or $0.44 per share (diluted) mainly due to the complex dynamics of the Intel Deal in 2006. As per the deal, till June 2008, Marvell is obligated to buy a minimum number of wafers, whether it needs them or not.

However, with its contractual obligations with Intel coming to an end, Marvell is finally in a better position to improve profitability. It also needs to come out of the options backdating scandal that slashed its shareholder value drastically and led to the resignation of its CFO George Hervey, as well as Weili Dai, the co-founder and wife of the CEO. Dai is still with the company in a non-executive position. Following the resignation of Michael Rashkin, a long-time executive who played the interim CFO role for a little while, it has appointed George de Urioste as the interim CFO. Rashkin apparently resigned due to health reasons. The revolving door in the CFO’s office, however, is not at all a good sign, and it does not offer confidence that the issues are being addressed.

In fiscal 2009, Marvell expects hard drive and wireless products to be the key drivers of its growth. Both are gangbuster growth markets, so no argument there. It has key design wins with Tier 1 market leaders in both the enterprise and retail access point markets. It also expects more design wins this year from its combo wireless devices for mobile and handheld devices, including 11BGA Bluetooth and FM-chips.

Just last month, it scored the design win for Samsung’s new 3G smart phone, i780. It is also expected to come up with a 3G Blackberry part soon. Its main competitor TI has recently cut its Q1 revenue forecast from $3.27-$3.55 billion to $3.21-$3.35 billion because of a major customer cutting back its orders for 3G chips.

For Q1 fiscal 2009, a seasonally weaker quarter, the economic uncertainty has led Marvell to give a somewhat conservative revenue guidance in the range of $775 million to $785 million, representing a y-o-y growth rate of 22% to 24%. The stock is currently trading around $10.5 and its market cap is around $6.4 billion.

The most important signal from the company needs to be that it has the options muck under control, which it doesn’t seem to have yet. Once this signal comes through, I think the business actually looks poised quite well, and the stock should recover. If you are brave, and believe that the options issues will get sorted, then go ahead and buy the stock, and position yourself for the recovery.

Chart for Marvell Technology Group Ltd. (MRVL)

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