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Marvell Technology Group Ltd. (MRVL): This Company Beat Earnings, But Does That Make it a Buy?

It was really fascinating to see chipmaker Marvell Technology Group Ltd. (NASDAQ:MRVL) beat the Street handsomely in the first quarter. While it was expected that the company would meet consensus estimates, Marvell posted big positive surprises on both the top and bottom lines.

What’s more, the company’s outlook for the second quarter proved to be the icing on the cake, as Marvell Technology Group Ltd. (NASDAQ:MRVL)’s earnings expectation of $0.17 to $0.21 per share on revenue of $770 million to $810 million were comfortably ahead of the Street’s earnings expectation of $0.18 a share on revenue of $764 million.

Take-off aborted

Marvell Technology Group Ltd.In an ideal world, you would’ve expected the share price to take-off in the wake of such results, and it did happen, although just briefly. Marvell Technology Group Ltd. (NASDAQ:MRVL) shares soared in after-hours, but they gave up their gains the next day. Marvell’s degrading metrics and its dependence on the storage business, which accounts for 53% of its revenue, weighed on analyst sentiment and investors were left in the lurch.

Clearly, the Street didn’t seem to be impressed by the fact that revenue declined 8% from last year to $734 million, while non-GAAP net income fell almost 30% to $98 million in the quarter. For a stock that’s run up close to 60% this year and trades at a rich P/E multiple of 23 times, the decline in revenue and earnings seemed to serve a sort of a reality check.

Improving trends

But then, there are certain trends which indicate that Marvell Technology Group Ltd. (NASDAQ:MRVL) is improving, and it is probably because of these trends that the stock has been on a roll this year. While analysts might be hollering about Marvell’s exposure to the storage business, and the declining PC market in turn, what many fail to realize that the trends in this business are positive, primarily driven by sales of chips for solid-state drives (SSDs).

Sales of chips for SSDs have been growing at a rapid pace this year, and the previous quarter once again threw up double-digit growth. This double-digit growth is expected to happen going forward as well, as Marvell Technology Group Ltd. (NASDAQ:MRVL) strengthens its relationship with top memory makers, recording more design wins and gaining market share.

Marvell is looking at market share growth of 5 percentage points in its SSD business this year. A similar pattern is expected in the hard-drive business, where Marvell expects to record share gains throughout the year on the back of key design wins at its customers, Seagate Technology PLC (NASDAQ:STX) and Western Digital Corp. (NASDAQ:WDC).

Both of Marvell’s bellwether customers are targeting different areas to grow their businesses, such as the cloud and hybrid drives. Seagate Technology PLC (NASDAQ:STX) is looking at cloud applications as the next frontier where growth in its business will come. The memory giant states that memory used in cloud applications is around 500 exabytes and it is growing at a rapid pace. Seagate is investing aggressively to position itself for the cloud and Marvell is expecting to ride the coattails of its illustrious client.

Similarly, Western Digital Corp. (NASDAQ:WDC) is also expecting growth from the cloud, but the company’s expectation from the market for hybrid drives is also quite strong. Hybrid drives deliver the characteristics (speed and thin size) of a solid-state drive at the cost of HDDs. Marvell is targeting the market for hybrid drives, a market which it says is small now but has great potential in the future.

Western Digital is looking to be at its best in this market and recently tied up with flash memory maker SanDisk Corporation (NASDAQ:SNDK) for developing a hybrid drive. While this deal with SanDisk should be beneficial for Western Digital, it could also turn out to be profitable for Marvell as well since SanDisk Corporation (NASDAQ:SNDK) has a history of using Marvell’s controllers in its SSDs.

Marvell expects its storage business to be flat this year as growth in SSDs is expected to be offset by HDDs. Thus, the performance isn’t too bad as some might think, especially considering that the PC market is in freefall but Marvell’s storage business is still holding steady on the back of newer applications for storage products.

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