The title sounds bad right? Einhorn has owned Marvell
Technology (MVRL) since he first started buying up the stock
during the third quarter of 2011. Recent news broke that Einhorn
sold off some 1.27 million shares of Marvell at around $10.16 per
share, worth some $12.9 million. Should investors consider this
sale as the change in his opinion about Marvell? Should we turn
bearish on Marvell now?
Much of the news that hit the wire when Einhorn sold some of his
Marvell stake over blew the story, when in reality, he was merely
freeing up some capital in what turns out to be a selloff of less
than 2.5% of his entire Marvell stake. The shares sold off by
Einhorn and Greenlight are just a small fraction of its total
stake in the semiconductor company; his sentiment about the stock
appears to be quite bullish based on his history with the stock
and his recent investor letter.
A robust history
Einhorn's Greenlight first dove into Marvell back in the third
quarter 2011, snatching up some 16.64 million shares. From there,
Greenlight has steadily increased its shares owned every quarter.
Einhorn's love for Marvell is not lost upon me. His hedge fund
called Marvell its fourth largest public equity holding at the
end of 2012 and made up 5.8% of his 13F portfolio, while Einhorn
did admit that Marvell was Greenlight's biggest loser in 2012,
falling from $13.85 to $7.26. Even still, Einhorn said this about
why, despite its recent troubles, Marvell is still in his
Though we'd love to just admit we are wrong, sell the stock,
and move on, we continue to like the opportunity here. Marvell is
on the cusp of a large product transition which, to put it
mildly, is not in the valuation.
Marvell's silicon solutions are primarily used for data storage,
communications and consumer markets. Its storage segment accounts
for nearly 45% of revenues and includes solutions primarily for
the hard disk and solid-state drive markets for leading hard disk
drive manufacturers, including Hitachi, Seagate Technology,
Toshiba and Western Digital.
One of its key growth initiatives includes making its mobile and
wireless segment (26% of revenues) a bigger part of revenues.
These include mobile products, such as communication and
application processors made largely for handsets and tablets.
Major customers include Research in Motion, Motorola and China
Its other major segment is networking (22% of revenues) and
includes wired and wireless switching solutions that enable data
transmission between communications systems, for networking and
wireless equipment makers, including Cisco Systems, Dell, Hewlett
Packard and Intel.
Marvell outsources a majority of its semiconductor fabrication to
third-party foundries, which is why it is a "fabless" company,
which is different from companies that have internal
manufacturing plants (called "fabs"). Fabless companies have not
invested money to to own and maintain a fab, allowing them to
focus more on developing and selling products.
I would be remiss if I failed to mention the late 2012 pressure
on the stock related to a verdict that will require Marvell to
pay out some $1.17 billion to Carnegie Mellon University for
patent infringement. This pushed the stock to a low of $7.40, but
since then the stock has recovered nicely. What's more is that
with this $1.91 billion in cash and short-term investments,
Marvell would be able to cover the judgement. Hopefully, there
will be positive news from coming from the patent trial with
Carnegie Mellon University, which moves to the next level
beginning May 1, 2013.
Einhorn has also publicly addressed the judgement, noting that it
could and should be reduced...
There are many grounds, but one of the simplest is that most
of the damages were awarded based on foreign sales that are
generally not protected by U.S. Patents. The jury found that
since the product was "designed and tested" in the U.S., damages
were payable even though the manufacturing and sales happened
The highlights for Marvell gets better, as the stock is also
trading on the cheap, especially when compared to notable comps.
|Price to FCF
From a valuation standpoint, Marvell is very intriguing. Its
five-year average P/E, relative to the S&P 500 price to
earnings ratio (company P/E divided by S&P 500 P/E) is 140%;
however, the company is currently trading at only 105%. What's
more, on a forward P/E basis (forward P/E of 11.6), Marvell
trades at a near 40% discount to the S&P 500.
Assuming Marvell gets the recognition it deserves, and shakes off
the Carnegie Mellow overhang, it should trade more in line with
historical P/E standards, near 140% the S&P 500. If so, the
upside is better than many analysts expect. Using the 2014 (ends
January) fiscal year analysts' EPS estimates ($0.78 per share)
and applying a 25.75 P/E, then the theoretical trading price is
around $20, an upside of nearly 100%.
- Over the last 10 quarters, Marvell has repurchased around
184 million shares, or 27% of its total outstanding
- During fourth quarter 2012, Einhorn upped his in Marvell by
- With $1.92 billion in cash and short term investments
($3.82 per share) and no debt, in essence, investors are buying
a company generating some $3.16 billion in revenue for $3.32
billion (enterprise value).
- Its cash conversion ratio is impressive, well in excess of
100%, currently at 175% (FCF/net income).
- Last quarter, in the HDD storage space, Marvell gained 5%
in market share and 50% of revenue was generated from storage.
In the SSD space, the business grew 40%, with Marvel now owning
some 50% of the share in the merchant silicon market.
- Marvell's plans to become more competitive in the mobile
market should help Marvell meet its margin targets. Its current
current operating margin is around 14%, versus its target of
20% to 25%.
- Standard & Poors expects stabilizing economic
conditions to result in 4% revenue growth in 2013 for the
semiconductor industry, up from a decline of about 3% in
Einhorn has been steadily upping his stake in Marvell since the
third quarter of 2011, and although the stock is down over 33%
since the end of third quarter 2011 to date, the company still
has growth prospects. For investors willing to wait, the tech
company does pay a 2.3% dividend yield that is well covered. The
annual dividend payout accounts for less than 25% of free cash
I think Einhorn is in Marvell for the long-haul. When he first
started scooping up Marvell shares in third quarter 2011, the
company traded around $15 per share, with the current stock price
still 33% below those levels. And why listen to Einhorn? Since
its inception in 1996, Greenlight has managed to return an
annualized 19.4% net of fees.
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