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Chip Maker Marvell Punished For Dip

Posted: Sep 03, 2008 15:15 PM by Ben McClure

Tickers in this Article: RIMM, AAPL, MRVL

Investors take note: Great results do not always translate into a great buying opportunity. Even when a company's fundamentals look strong, the smallest sign of a dip in growth can send a share price south.

That's what happened to Marvell (NYSE:MRVL). Despite delivering a superb set of second quarter results, the electronic chip maker took a 5% dip off its valuation. Marvell offered "conservative" earnings guidance that suggested a slight dip in outlook for Q3 and Q4, while Wall Street was hoping for something better. In other words, management showed what the future looked like - and shareholders got punished. (Explore the controversies surrounding companies commenting on their forward-looking expectations in Can Earnings Guidance Accurately Predict The Future?)

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Q2 Numbers Solid
Even so, it's hard to find fault with the Q2 numbers. Profit climbed to $71.4 million, or 11 cents a share, compared with a loss of $56.5 million, or 10 cents a share, a year ago. Excluding certain items, profit was up $154 million, or 24 cents a share, handily topping analysts' estimates of 21 cents a share. Revenue gained 28% to $842.6 million from $656.7 million a year ago.

Importantly, Marvell showed sustained profitability and excellent free cash flow generation. Gross margin in Q2 grew 52.3% from 49.4% a year ago. Cash flow from operations was up 40% from the previous quarter to $183 million. (To learn more about these measurements, read The Essentials Of Cash Flow.)

Fortunes Buoyed by Strong Demand
Marvell fortunes have been buoyed by strong demand for its chips used in hard-disk drives, Wi-Fi wireless communications, internet networking devices and mobile phones, including Apple's (Nasdaq:AAPL) iPhone and Research in Motion's (Nasdaq:RIMM) BlackBerry. But, rightly so, the market is anxious about what's in store for upcoming quarters. CFO Clyde Hosein says the possibility of weaker orders from technology companies worried about a tough Christmas shopping season prompted Marvell's cautious guidance.

Attractive Fundamentals, But...
The stock is priced a notch lower than before its Q2 results. At $14.11, it is trading at about 14.25 times 2008 earnings. Considering the company's track record in producing earnings growth, that's a good-looking P/E ratio. What's more, the company is sitting on a whopping $889 million, or $1.46 per share, in cash.

A Need for Caution
Nonetheless, take care with this momentum stock. A quick look at its trading record suggests that sizable share price jumps are often followed by extended gains for the stock. By the same token, a share price drop, like the one that followed Marvell's conservative guidance last week, is often followed by a precipitous decline in value. In other words, Marvell's stock price has a penchant for moving too far in one direction, even in the face of attractive fundamentals.

Bottom Line
Given the uncertain market backdrop and the absence of any obvious share price catalysts, Marvell is a risky place to put your money. Rather than getting caught on the wrong side of the momentum cycle, investors should wait for a turnaround in the market, or at least for a better price to come along, before diving into Marvell.

By Ben McClure

Ben McClure is director of McClure & Co., an independent research consultancy. Before founding McClure & Co., Ben was a highly-rated European equities analyst at London-based Old Mutual Securities. He also spent several years as a business/technology journalist at the Economist Group. McClure graduated from the University of Alberta School of Business with an MBA.

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