An Apple a Day Makes Marvell an Interesting Play
Written by: Aaron Katsman | August 27, 2007
Aaron Katsman
www.IsraelNewsletter.com
In these volatile market conditions, the last thing a company wants to do is disappoint the Street. So it came as no surprise that when Marvell Technology (MRVL) said its gross margins would be “slightly over” 48% for the current business period, down from 51.3% in the same quarter last year, that the stock got smashed (almost 12% down).
Marvell designs chips used in hard-disk drives, mobile phones, Wi-Fi functional electronics and Internet networking gear. The company has been embroiled in its own options backdating scandal, and has been focused on getting its financial house in order. To me what was most worrisome about this quarter’s numbers, was not just that they cut margin forecast, but that this is the second consecutive quarter that they have done so. Sort of like the Bears working all week with Rex Grossman on the center/qb exchange only to see him fumble again.
But unlike Rex, I really think that Marvell makes for an interesting turnaround story. The company posted better than expected revenues and raised revenue guidance going forward. You may think that they are increasing sales by cutting prices, thus the lower margins; but if this is so, what have they accomplished? I think that the margin problems are a result of productions costs, and they are addressing this by shifting production on some products to Taiwan Semiconductor (TSM), which will cut costs. They are getting to the bottom of the backdating mess, which will allow them to get back and focus 100% on growing the business. In fact, in a bid to expand their consumer electronics business, they made four acquisitions. One of those deals was buying the cell-phone processor line from Intel (INTC). Those processors are used in the Blackberry made by Research In Motion Ltd. (RIMM).
And then there is Apple (AAPL). Marvell is currently supplying the Wi-Fi- chip in the iPhone, and many analysts are predicting that they will grow the Apple relationship, especially for the next-generation video iPod player.
The last 18 months haven’t been kind to the stock, as it has dropped by more than 55%. If they will fix the margin problems, and with increasing sales, and the potential with Apple, it seems that this will be recipe for success over the next 18 months. For investors looking at a turnaround play, Marvell may just turn out Marvelous!
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Disclosure: Author has a position in MRVL as of 8/27/07, author holds no other positions in other stocks mentioned.
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Aaron Katsman is the lead portfolio manager for the Israel Growth Portfolio and Managing Director of America Israel Investment Associates, LLC. For more information, go to www.israelnewsletter.com or call 1-888-327-6179, or email aaron@profile-financial.com.
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