Marvell - Valuation

Sunday, April 27, 2008

[Originally for Sramana Mitra's site]

I value Marvell at $21 per share. As we have evaluated in this series, the company draws its strengths from the stable revenue coming from its storage, ethernet and WLAN businesses. Its primary weakness is its perceived inability to control its expenses that have resulted in a poor profit/loss record despite growing revenues. The growth driver is its application processor business that will benefit from 3G and smart-phone market growth.

If Marvell plays its cards right, its wireless business can grow to contribute around 40% of its revenues in five years. This will come at a CAGR of up to 30% supported by a sustained market share in the application processor space. The communication processor and the connectivity solutions businesses will help sustain the application processor market share. This requires Marvell to actively develop competitively priced high-performance solutions and in-house platforms in the future.

‘Tavor’ is a very good strategic initiative. It also needs to successfully ship its WLAN, Bluetooth and FM combo-chip. If it can deliver on its envisioned low-cost GPS solution, perhaps as a single chip with the other connectivity solutions and also integrate these in a platform, then it will be a force to reckon with. Perhaps, as I have alluded to here, a merger with SiRF may work out well for the company.

These strategic initiatives will not make much more financial sense if Marvell fails to trim its enormous expenses. I have assumed that it will be able to turn around and cut its operational expenses to about 35% of its total revenues. If the company fails to do so rapidly to achieve nominal expense targets, then the valuation will fall down to $9. Today, its operational expenses are significantly higher resulting in a loss for fiscal 2008. It is true that the agreements to source from the Intel foundries have resulted in some efficiency loss. But I don’t think they alone account for the high expenses. It is becoming clearer to me that Marvell has to further trim its work-force to at least demonstrate a commitment towards making itself more nimble.

In summary, if Marvell keeps a tab on its expenses, its value will double up. If it can also gain baseband communication processor market share, its value can increase further. The aggressive management’s iron-hand administration and the Sutardja family’s personal stake in the company will drive both efficiency and business development. So, while $10 is a good price to pick up the stock, the realization of my valuation will depend on how quickly Sehat and his team can achieve this turnaround. For those who own this share, be ready to let go between $15 and $20 if you don’t hear of design wins for its single-chip XScale solution or if you don't see efficient expense management. For those of you hoping to make a quick buck, I would suggest looking elsewhere despite this stock’s undervaluation just given its uncertainty.

Posted by Vijay Nagarajan at 7:00 AM  

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