Marvell's not far from marvelous
Every once in a while, a company gets punished a bit too much for things that are out of its control. This chipmaker's shares remain undervalued.
After the recent 6% decline of Marvell (MRVL) shares following what was, on balance, a very good earnings report late last month, the Street seems to have decided it was time to reevaluate what's been going on at this company.
This is another way to say the analysts want to catch their breaths. It's the only explanation that I can come up with. But I don't agree with it.
After losing more than 50% of its value in 2012, shares of the chip giant have been up by more than 90% since reaching bottom at $6.98 last December. This fact has not been lost on those who feel this performance is unjustified. I'm not going to pretend I didn't have my own doubts. But I've been at this long enough to know that every once in a while, a company gets punished a bit too much for things that are often out of its control. This recent overreaction to Marvell's second-quarter results looks awfully familiar.
First and foremost, there's no denying Marvell hasn't been as popular as the more prominent chip companies -- namely Qualcomm (QCOM) and Broadcom (BRCM), which have both "chipped" away at Marvell's strength in mobile and wireless. But unlike Qualcomm and Broadcom, Marvell beat its earnings and revenue estimates this quarter and also demonstrated enough confidence to raise guidance.
I don't want to overstate what this means. But I also know there hasn't been another company within the semiconductor space to accomplish this. Given the company's 10% sequential revenue growth, which was 2% better than expectations, I don't believe there's another chip company (not named Qualcomm) that's been performing as well as Marvell.
The Street disagrees. That's all well and good. But Marvell doesn't appear to be just a mobile/wireless growth play, either. The company also has a much underrated non-PC applications segment, where it enjoys better-than-expected demand in areas such as solid-state drives (SSD), a market where companies including Micron (MU) have shown tremendous growth.
Let's not forget that from an operational perspective, Marvell continues to rake in the cash flow as operating income surged 23% sequentially, which was roughly 10% better than the consensus estimate. Also, given the fact that Marvell beat gross margin expectations by 50 basis points, it was clear that management's focus on higher margin businesses has had a positive effect on the company's profitability.
Again, I don't begrudge anyone who chooses to be cautious here on the basis of Marvell's valuation and its stout stock performance. There's absolutely nothing wrong with "taking a bit off the top" to preserve some gains. But let's call it what it is. To suggest that Marvell's results were a disappointment, especially after management raised the midpoint of its guidance 3% higher than expected, makes absolutely no sense whatsoever.
I'm not saying that this company is flawless. Admittedly, I wasn't particularly impressed with Marvell's poor showing in networking. But Cisco (CSCO) didn't exactly blow the doors off the sector, either. But that too, is being used as a reason for the stock to take an undeserved break. But I expect that this will be short lived.
I don't believe that Marvell's management has gotten the credit it deserves for having navigated the company from the brink of collapse to one that is now growing revenue and margins. Accordingly, I believe that these shares remain undervalued on the basis of long-term free cash flow growth.
While the company does have some near-term challenges to overcome and more credibility to build, Marvell is more than holding its own in an unpredictable chip environment. In the meantime, I expect to see the stock reach $15 before the end of the year.
At the time of publication, the author held no position in any of the stocks mentioned.
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