Marvell Technology Wins Windows Surface Slot
MRVL

October 29, 2012

Marvell Technology Group (MRVL) won a slot in the Microsoft Surface tablet computer. According to Anandtech (Inside Microsoft's Surface RT Tablet, October 16, 2012), the WiFi chip on the tablet is Marvell's. NVIDIA won the main prize with its Tegra 3 ARM-based processing chip. Atmel also had chips in the design. The tablet runs the new Windows 8 RT operating system.

We don't know how many of the WiFi chips Marvell shipped to Microsoft in the summer quarter (Marvell's fiscal Q3 2013 ending October 27, 2012), but it was not enough to balance the damage in the hard disk drive (HDD) controller chip business. Marvell dominates HDD controller chips, but the problem is that the largest single use of HDDs in in PCs. It was a terrible quarter for PC sales, and little HDD makers Seagate and Western Digital could do about it.

Marvell had guided revenues to $800 to $850 million. The update issued on October 18 put revenues at $765 to $785 million. At the midpoint there is a $25 million miss on the low end of prior guidance. Just about all of that came from the HDD segment. Marvell also makes chips for smartphones, for networking (ranging from WiFi to high-end datacenter Ethernet), for Google TV and similar appliances, and for video processing in HD TVs. It is moving into new areas like LED controllers.

The fourth quarter is a big question mark. A lot depends on the global outlooks of OEMs. If they are pessimistic they may further shrink inventories. If holiday sales go well, they may have to expand inventories, giving chip manufacturers like Marvell a boost.

While there is a lot of uncertainty about Q4 and about 2013, Marvell is well set to manage their way through it and eventually expand into new businesses, as they have in the past. Even at the current level of revenue Marvell is a cash cow. At the current stock price, $7.755 at the close Friday, you are buying $0.75 in trailing 12-month earnings and dividends of $3.1% per year, plus a cash balance of $2.13 billion, or $3.82 per share. In the latest quarter cash flow from operations was $0.34 per share. It looks to me like the market over-reacted to the revenue miss. At this price Marvell stock is well worth the risk, in my opinion. But then I started accumulating Marvell stock years ago.

Marvell is large enough and diverse enough that if only moderate numbers of Microsoft Surface tablets get sold, that probably won't have a significant impact on Marvell revenue or profit. Then again, the Microsoft Surface is a really hot device, and may sell in more than moderate numbers. It is on my wish list.

Disclaimer: I am long Marvell and Seagate. I will make no position changes in them for a week after this article is published. I do not have a position in Microsoft, Western Digital or NVIDIA and also will not initiate one for a week. Also, I occasionally do freelance work for Microsoft.

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