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Strategies & Market Trends : Technical analysis for shorts & longs -- Ignore unavailable to you. Want to Upgrade?

To: Johnny Canuck who wrote (46761)	5/31/2011 9:26:17 PM
From: Johnny Canuck	Read Replies (1) \| Respond to of 70155

Tickers in this Article: AAPL, CHL, INTC, MRVL, QCOM, RIMM, TXN The Street reacted very favorably to Marvell Technology's (Nasdaq:MRVL) first quarter earnings report. Actually, it wasn't the quarterly earnings that anybody cared about, it was the stronger guidance for the next quarter and the evidence that business may have bottomed out. Although there are still some cosmetic risks to the Marvell story in addition to the fact that Wall Street appears to be re-warming to the name, investors may still be able to pick up shares here and look at the price as a bargain. Get Free Stock Analysis By Email TUTORIAL: 20 Investments To Know A Tough Start to the Year Nobody expected Marvell to have a good first quarter, and Marvell obliged with a pretty pungent set of results. Revenue fell 6% from the year-ago first quarter and 11% from the prior quarter, led by a 30% sequential drop in sales from chips for the mobile and wireless markets. Hard drive controller chip sales also slipped (down 1% sequentially), while networking sales rose 4% (but contributed less than 25% of total sales). As is pretty typical for tech companies, operating leverage cuts both ways and revenue declines turned into even bigger drops in profitability. Gross margin retreated about 40 basis points from the January quarter (and a point and a half from the year-ago level), and operating margin dropped more than five full points, as operating income fell close to 30% on both an annual and sequential basis. Better Days Ahead? Management brightened the mood of institutional analysts by lifting guidance for the next quarter, though it is interesting that roughly 1% extra revenue (using the midpoint of company guidance and the prior average analyst estimate) was enough to get them excited. Be that as it may, there are definitely some reasons to be encouraged about Marvell's prospects. Major design wins within China Mobile's (NYSE:CHL) smartphones should be a significant opportunity as those phones roll out. Marvell is also seeing good growth in its solid state drive (SSD) chip business and that will likely help the company maintain its strong position in storage. The company also has some longer-term opportunities in WiFi connectivity, and a bottoming-out of the PC business (assuming that new chip launches from Intel (Nasdaq:INTC) goose the market) will help. What About RIM? One of Marvell's biggest problems has been Research In Motion (Nasdaq:RIMM). RIM has been one of Marvell's largest mobile/wireless customers, but RIM's ongoing share losses in North America and shifts toward lower-end phones has gutted the revenue growth in this relationship. Worse still, it seems the relationship has soured a bit; RIM has chosen Qualcomm (Nasdaq:QCOM) over Marvell for some phone chips and tapped Texas Instruments (NYSE:TXN) for the processor for the Playbook. Although lost business is never good (unless the margins were terrible), doing less business with RIM may not be such a bad thing. RIM is clearly losing the battle with Apple (Nasdaq:AAPL), Samsung and Motorola (NYSE:MMI) and may be on the same dismal trail blazed by Nokia (NYSE:NOK). If RIM cannot turn itself around, it may not be such a bad thing for Marvell to have less exposure - rowboats may be uncomfortable, but they beat staying aboard the Titanic. The Bottom Line Taking a worse-case scenario and zeroing out RIM entirely from Marvell's forward earnings and cash flow still leaves a target price that is about 15% higher than today's price (and that's assuming pretty healthy margins for that business). Assuming that Marvell can keep some of that business and/or replace it with other customers, the stock looks like a solid value/turnaround idea. The company's exposure to disk drive storage and PCs are still risk factors, but there is no such thing as a risk-free chip stock. Even with Friday's relief rally, Marvell is a name that has reached a point where value-oriented investors should take a serious look. (For related reading, also check out Is The New Smartphone ETF A Smart Idea?) Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free! By Stephen D. Simpson, CFA Stephen D. Simpson, CFA, is a freelance financial writer, investor, and consultant. He has worked as an equity analyst for both sell-side and buy-side investment companies in both equities and fixed income. Stephen's consulting work has focused primarily upon the healthcare sector, while he has also written extensively for publication on topics pertaining to investments, security analysis, and healthcare. Simpson operates the Kratisto Investing blog, and can be reached there.