Year to date, shares of Marvell Technology (MRVL) are up almost 71%. Is the company's turnaround priced in or can this stock go higher?
One of the best-performing semiconductor stocks this year has been Marvell. The stock bottomed out in September 2015 and has been tracking higher as the company has worked hard to turn itself around.
Last week Marvell Technology reported non-GAAP fiscal third-quarter earnings of $0.20 per share, which were $0.08 better than the consensus estimate. Revenue fell 3% from a year earlier to $654 million, but beat the consensus estimate of $615.8 million. Gross margin was 56.7% and operating margin ended the quarter at 17.6%.
Over half of total revenue came from hard drive and solid-state storage semiconductors. Storage revenue grew 27% year over year and was up 19% sequentially.
Networking ended the quarter at 23% of total revenue and was up 20% year over year, but down 6% sequentially because of seasonality. The company sells embedded processors, switching components and Fast Ethernet transceivers (typically called PHYs). The company recently introduced a line of 25G solutions for data centers.
Revenue declined 50% in the Wi-Fi/Bluetooth business as the company plans to exit that business. Wireless represents 18% of total revenue. Marvell is transitioning its business toward high value-add semis in wireless and the Internet of Things (IoT).
Earlier this month, management announced a comprehensive plan to restructure the company. Marvell plans to reduce expenses by $240 million to $260 million by eliminating more than 900 positions and significantly reducing legal and accounting costs. In addition, the company plans to divest non-strategic businesses with about $60 million in operating expenses and $100 million in revenue. The company plans to take a restructuring charge of $90 million to $110 million over the next four quarters, including a cash charge of $35 million to $50 million.
The board of directors authorized a $1 billion share repurchase program, which replaces the prior $3.25 billion program. The previous program had $115 million of buyback authority left. Management plans to repurchase $500 million of stock over the next 12 months.
The net effect of all this activity will be to target growing industries where the company can better compete. Because of all the restructuring charges management gave guidance that was not comparable to the previous analyst estimates.
For the fourth quarter, Marvell is looking for revenue of $565 million, which would be up 2%, and fully diluted non-GAAP earnings between $0.17 and $0.21 a share.
I have a few problems with Marvell.
First, revenue is expected to fall 12%-13% this year and another 2%-7% the year after. That's a wide range of guesses. The markets that Marvell is trying to break into are highly competitive and there is no guarantee of success. Revenue growth could be stalled until 2019 or longer.
Second, selling semiconductors into the hard drive business isn't a growth business. Hard disk drive (HDD) sales are slowing in favor of solid-state drives (SSD). The only good news is Marvell's SSD controller business, which is growing around 15% annually, but it's only 20% of the storage business. Storage is about half of total revenue. That's not enough to drive the top line.
Third, selling into the Ethernet PHY space is not exactly a piece of cake, either. Broadcom (AVGO) dominates the 25/50/100G Ethernet transceiver business. Marvell sells a lot of low-speed parts, but who wants a 10G transceiver when it's just as easy to use a 25G part? It could take a while for the company to win 25G sockets because it's at least a year behind the competition.
Fourth, tech investors are a pretty savvy bunch and already have piled into Marvell. The stock is already trading at 20.5x fiscal 2018 estimates of $0.72 a share. Semis with low single-digit growth typically trade with a mid-teen forward multiple (15x-17x), so it seems that investors already have placed their bets on Marvell. And besides, to find single-digit revenue growth you probably need to go out to 2019! That's too long to wait.
Until the company can show stronger revenue growth or the valuation of the stock comes down, I would avoid shares of Marvell.