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Marvell Technology Group Ltd. (MRVL): Why This Stock Is Not Out of Favor

Marvell Technology (MRVL)Despite declining revenue, Marvell Technology Group Ltd. (NASDAQ:MRVL) remains a solid investment target to ride cloud storage and LTE trends.With a diversified product portfolio ranging from mobile communications to data storage, cloud infrastructure, and networking, Marvell provides complete solutions to enable the digital connected lifestyle. With continuous adoption toward more digital connected lifestyle and increasing mobile demand, Marvell Technology Group Ltd. (NASDAQ:MRVL) is poised for more growth.

Declining revenue but better-than-expected results

For Q1 2014, Marvell Technology Group Ltd. (NASDAQ:MRVL) reported better-than-expected earnings of $0.19 per share, beating analysts’ estimate of $0.14 per share. The revenue of $734 million also beat the estimate; however, it declined 24% sequentially. Overall, Marvell witnessed better demand in its Storage and Networking segment while Mobile and Wireless was below management’s expectation. Nonetheless, management believes Q1 was the trough for the Mobile segment. Marvell continues to make solid progress in its Mobile segment at multiple Tier 1 OEMs with its integrated 3G and 4G platforms.

Margins and balance sheet

Non-GAAP gross margin was 54.6% and operating margin was 12% in Q1. Marvell Technology Group Ltd. (NASDAQ:MRVL) had cash and equivalents of $1.7 billion at the end of Q1, down $186 million sequentially. The company repurchased around $200 million worth of shares and returned about $30 million in Q1. About 29% of its total shares have been repurchased and retired in the past 11 quarters.

Outlook

Management expects the Storage segment to be roughly flat with double-digit growth in SSDs for Q2, offset by a slight decline in HDDs. As for the Connectivity segment, management expects solid year-over-year growth in fiscal 2014. The Mobile and Wireless segment is expected to grow in double-digits sequentially for Q2, whereas the Networking segment is estimated to grow in the low to mid-single digits sequentially. Overall, revenue is projected to be $770 to $810 million for Q2.

Product development and five-mode LTE Solution

Management continues to invest steadily in advanced storage technologies as it believes that storage needs for consumers and enterprises will continue to grow.

Marvell Technology Group Ltd. (NASDAQ:MRVL) continues to make strong progress in LTE. Earlier, a fully integrated, quad-core 5-mode Cat 4 LTE solution, specifically targeted for the mainstream 4G market was announced. Marvell’s new PXA1088 LTE is the industry’s first mass market quad-core 5-mode Category 4 LTE single-chip solution, supporting LTE TDD and FDD with several key features, including doubling the graphics performance compared to the 3G solution and supporting voice over LTE.

This technology is field proven and certified by major global operators, such as China Mobile Ltd. (ADR) (NYSE:CHL). China Mobile Ltd. (ADR) (NYSE:CHL) continues to invest heavily into 4G TD-LTE and will be inviting around 5,000 users to start testing the TD-LTE service in Shanghai in June. China Mobile Ltd. (ADR) (NYSE:CHL) is also rumored to launch its 4G network nationwide later this year if everything goes smoothly.

Marvell supports TDD-LTE, FDD-LTE, WCDMA, TD-SCDMA, and GPRS 2G and is confident to win the multi-mode LTE battle because it has both a mature five-mode LTE modem and a mature apps processor. The five-mode LTE chip is a device that not only works in China, but also in North America and Europe. Marvell Technology Group Ltd. (NASDAQ:MRVL)’s differentiation lies in its strength in the international market and being one of the leading LTE chipset companies.

What now?

Marvell’s outlook on the data storage continues to be positive as Western Digital Corp. (NASDAQ:WDC) and Seagate Technology PLC (NASDAQ:STX) continue to shed their dependence on PC hard drives and shift toward cloud storage with growing demand. Both companies had reported better-than expected results recently.

Western Digital Corp. (NASDAQ:WDC) continues to innovate and improve its offerings in the mobile end with the upcoming showcase of solid state hybrid drives (SSHD) and 5 mm ultra-slim hard drive technologies for tablets and other thin-and-light devices at Computex Taipei 2013. These would be the world’s first ultra-slim 2.5-inch 5 mm hard drives and SSHDs for the slimmest devices. On the other hand, Seagate Technology PLC (NASDAQ:STX) continues to cut costs and shift toward the cloud market while PC sales continue to decline with increasing customer dependency on mobile devices. However, after the consolidation in the HDD market, both Western Digital Corp. (NASDAQ:WDC) and Seagate Technology PLC (NASDAQ:STX) are expected to see P/E expansion as both companies now focus on profitability.

The success of the Storage segment is critical to Marvell’s operation as it accounted for 47% of its revenue last year. Although the mobile and the wireless markets remain competitive, Marvell Technology Group Ltd. (NASDAQ:MRVL)’s development on LTE should give it a boost in the long-term as China Mobile is determined to dominate the 4G market in China where Marvell’s five-mode LTE solution gives it multi-band capabilities.

Bottom line

With zero debt and a healthy balance sheet, the fundamentals remain strong for Marvell despite the declining revenue. The revenue should improve as storage demand continues to grow, driven by cloud storage. On the other hand, despite strong competition in the wireless and mobile end, Marvell’s LTE solution still has an edge and will benefit from China Mobile’s aggressive expansion.

The article Why This Stock Is Not Out of Favor originally appeared on Fool.com and is written by Nick Chiu.

Nick Chiu owns shares of China Mobile. The Motley Fool owns shares of China Mobile and Western Digital. Nick is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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