Marvell Technology Group Ltd. (NASDAQ:MRVL) was down as much as 15% last week on news that a federal jury has ordered the chip-maker to pay nearly $1.2 billion for infringing on patents held by Carnegie Mellon University. The initial damage award comes out to about $2 per share, but the stock is only down $1.30, effectively pricing in a $700 million hit or 60% of the total award.
With $2 billion in cash and the ability to generate strong cash flow – having generated between $70 and $250 million in each of the last eight quarters – we believe that Marvell can weather the storm. This is the third largest patent award in history, not too far ahead of the $1 billion award in the Apple-Samsung case earlier this month.
Marvell is hopeful the judge will reverse the verdict based on post-trial motions, and if not, the tech company plans to appeal. Even the $1 billion award in the Samsung-Apple fallout is expected to at least be reduced according to Pamela Jones. The founder of Groklaw, a website dedicated to legal suits concerning software, believes the damages will be reduced and that there is a “real possibility that Samsung will get a new trial, at least on the damages issue.”
From a valuation standpoint, Marvell trades well below quick-growers Qualcomm and Broadcom at 12x earnings, and is the cheapest on a P/S basis (1.2x) as well. Marvell should benefit from its plans to boost gross and operating margins, which are currently 52% and 14%, respectively. The tech company’s targets are a 57% gross margin and a 25% operating margin.
Assuming that David Einhorn still owns the 32 million shares that he had at the end of 3Q, Greenlight Capital lost upwards of $32 million last week on the sell-off. What’s more is that Greenlight might have lost over $65 million since the beginning of 4Q given Marvell is down almost 25% over this time. Einhorn is Marvell’s most committed hedge fund owner of those we track (check out David Einhorn’s newest picks).
What about Marvell’s competitors?
LSI Corp (NASDAQ:LSI) is expected to see revenues up 22% in 2012, but sees declination of 5% in 2013, where growth is held back by weakness in its core hard disk drive business. This decline in hard disk demand is in large part due to the increasing prominence of Ultrabook PCs and tablets. One positive for LSI is its solid-state drive business, which accounts for roughly one-tenth of revenues, where growth is expected to be upwards of 200% this year. Although we are encouraged by this segmented growth, we remain concerned given it is still only a small portion of sales.
Valuation is another point of concern. Due to the tech company’s less than stellar growth prospects, it likely should not trade in line with Qualcomm and Broadcom, near 20x earnings. Interestingly, billionaire Ken Griffin – founder of Citadel Investment Group – is one of LSI’s top investors with over 23 million shares owned as of 3Q (check out Ken Griffin’s new picks).
Intel Corporation (NASDAQ:INTC), meanwhile, is the chip-making giant that is feared by many as a value trap, but it does have appreciative potential going forward. Revenues are expected to be down 1% year over year in 2012, due to soft PC sales. Boding well for Intel is its scale, though, giving it exposure to quickly-growing emerging markets, as two-thirds of PC demand is currently coming from this area. Intel trades the cheapest of the five stocks listed here at 9x earnings, and its solid 5-year expected EPS CAGR of 12% puts its PEG near 0.8. Ken Fisher – founder of Fisher Asset Management – is one of Intel’s top shareholders (see Ken Fisher’s newest picks).
Broadcom Corporation (NASDAQ:BRCM) is one of the best value/growth stories in the semiconductor market, expected to grow EPS at 12.5% annually for the next five years. Couple this with its industry-low P/E and the stock trades with a PEG of only 0.9. Sales are expected to be up 8% in 2012 and 7% in 2013. Broadcom also has strong positions with Samsung and Apple and has a exposure to the fastest growing semiconductor markets: mobile, broadband and network infrastructure. Jim Simons is one of Broadcom’s big-name investors (check out Jim Simons’ top picks).
Qualcomm, Inc. (NASDAQ:QCOM) is another solid investment opportunity offering growth at a reasonable price. The stock trades at only 15x earnings, but is expected to grow long-term EPS at 16% annually, putting its PEG just below 1.0. Revenues are expected to be up 25% in FY2013 and 10% in FY2014 on the back of high penetration in the smartphone marketplace. Qualcomm also boasts a strong balance sheet, with over $12 billion in cash and no debt. This will help the tech company make strategic acquisitions and allow for potential dividend hikes; its current dividend yields 1.7%. Now, George Soros’ was actually dumping 50% of his shares last quarter (see all of George Soros’ new picks), but it’s likely that this move was purely tax-motivated.
To recap: we believe that the recent sell-off of Marvell shares presents investors with a solid investment opportunity. Marvell’s recent sell-off suggest investors are banking on a reconsideration of the $1.2 billion ruling, suggesting the total payout might only be 60% of the award. We believe this is a solid thesis and feel that the tech company will also take necessary measures to preserve its $0.06 per share dividend. For more similar coverage, continue reading below:
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