Friday, March 7, 2008

Marvell (MRVL) Drops on Good Quarter Results

Marvell Technology Group (MRVL) reported its results for the quarter ending February 2, 2008 after the market closed Thursday. Results were far better than the guidance that Marvell management gave at the prior, November 27, 2007 analyst conference. They also beat the street estimates. But the stock price sank like a stone this morning. What is going on?

Only the people who dumped the stock this morning know for sure, but the explanation is not that Marvell's results were bad. I think one or more major players had a leveraged long position, based on guessing correctly that MRVL would report a great fiscal Q4 2008. In after-hours trading the stock bumped up nicely, at first. When the stock price then fell, still in after-hours trading, these longs dumped. When a stock is falling in today's illiquid market, no one wants to touch it, no matter what the fundamentals. Everyone is asking, do the sellers know something I don't know? (Which is always a good question to ask. Some times they do; usually they don't.) On the other hand there are some things that Wall Street does not like, which I'll come back to below.

Let's look at the actual results and the prospects for calendar 2008 (Marvell is now into their fiscal year 2009). For more data see my Summary of the March 6, 2008 Marvell Analyst Conference.

Revenues were $844 million, up 11% sequentially from $758 million and up 36% from $622 million year-earlier. That is a phenomenal growth rate. True, it is partly from acquiring Intel's Xscale division, but mostly it is organic growth from its key semiconductor chips that enable high capacity hard drives.

GAAP net income was $1.3 million, reversing a loss of $6.4 million in fiscal Q3, and a loss of $140.6 million year-earlier (fiscal Q4 2007).

I usually recommend using GAAP net income as a guide to the value of a company, rather than non-GAAP numbers, which in the late 1990's had become largely out of touch with reality. But Marvell's numbers are part of a bigger story. In 2007 it digested the Intel Xscale division (a money loser for Intel), resulting in poor numbers. That digestion is completed now, so the GAAP numbers are getting better rapidly, as you see in the $140 million GAAP net income improvement over the year-earlier quarter.

Non-GAAP net income of $123 million excludes stock-based compensation of $70 million, $8 million for restructuring and $44 million for amortization. Cash was up in the same ball bark, increasing by $100 million sequentially. With $631 million, cash is adequate but not a factor in the stock price, given that there is a $391 million debt from the Intel Xscale acquisition.

Marvell's analog and digital chip business is seasonal due to its consumer components, but I think it is safe to multiply by 4 to get a forward annual non-GAAP net income of about $500 million. As I write Marvell's market capitalization is $6.13 billion. That gives a price to earnings ratio of 12.26.

A well managed, rapidly growing company with a forward non-GAAP PE ratio of 12.26. What more could Wall Street want?

There is a legitimate, but probably overblown, concern that there will be a future macroeconomic impact on the hard-drive industry, Marvell's key customer. But that goes against the strong trends that helped Marvell's results in the latest quarter.

Judging from analyst's questions at the last few analyst conferences, Wall Street does not like Marvell's pursuit of long term growth. They want Marvell to cut its heavy R&D budget. They want stock-buy backs to reward short-term investors and screw long-term investors. They want more certainty, not Marvell taking its business of combining very high level digital and analog engineering skills into an ever wider arena of products.

In an oblique answer to a question about paying down the outstanding loan, management said there were better uses for the cash it has and is generating. I would read that tea leaf as saying they are still looking for appropriate acquisitions. Which means more spending of cash and accounting write downs. In a booming market Wall Street would urge you to buy this stock because of rapid growth, but right now the idiots at Pitigroup and Peril Flinch are hunkering down trying to bury their recent mortgage derivative mistakes. Using your money.

Which is why you should not let the guys on Wall Street manage your money and take exorbitant fees for that service. What seems nice as they steer their herds one way for a few years never seems to work out very well for the long run.

Marvell of course is a risky stock. Management has a history of taking risks, entering new fields of the semiconductor industry. There are the usual macroeconomic and competitive risks.

I own Marvell stock and would buy the whole company today, at this moment's stock price, if I had that kind of cash.

In the meantime, keep diversified.

More data:
My Marvell main page

No comments:

Post a Comment