Seagate Technology PLC (STX), Western Digital Corp (WDC): Buying Marvell Technology Group Ltd. (MRVL) After Its Recent Drop Makes Sense

Chipmaker Marvell Technology Group Ltd. (NASDAQ:MRVL) fell by nearly 6% last Friday after reporting second-quarter results. The company beat consensus estimates comprehensively on both revenue and earnings, and offered decent guidance. However, some analysts are of the opinion that Marvell Technology Group Ltd. (NASDAQ:MRVL)’s networking business, which accounted for 21% of overall revenue in the previous quarter, is not in the best of health.

Marvell Technology Group Ltd. (NASDAQ:MRVL)A closer look at Marvell Technology Group Ltd. (NASDAQ:MRVL)’s results will make it clear that all is not bad. Investors can use the recent drop to scoop up more shares of a company that has been on a terrific run this year, appreciating 70%.

Storage is strong
The storage market is Marvell Technology Group Ltd. (NASDAQ:MRVL)’s biggest. It makes up 52% of the company’s overall revenue, and it has been improving steadily. Although the PC market is in a slump, Marvell’s storage business has done well on the back of shipments to enterprise customers and use of hard disks for non-PC applications. Moreover, the company says it is winning market share and saw sequential enterprise shipment growth of 80% to its top North American customer.

In addition, Marvell Technology Group Ltd. (NASDAQ:MRVL) is seeing strength in sales of its solid-state drive, or SSD, controllers, as revenue and unit shipments of SSD controllers doubled from the year-ago period. Similarly, Marvell is applying its expertise to develop low-cost solutions for hybrid drives as it expects this market to become a substantial opportunity in the future.

Marvell Technology Group Ltd. (NASDAQ:MRVL) counts both Seagate Technology PLC (NASDAQ:STX) and Western Digital Corp (NASDAQ:WDC) as customers, apart from others such as Toshiba, in the storage business. Western Digital accounted for 24%of its revenue in the previous fiscal year, while Seagate Technology PLC (NASDAQ:STX) has grown from being a less-than-10% customer in fiscal 2012 to having a 10% share in fiscal 2013.

Relying on Western Digital Corp (NASDAQ:WDC) for almost one-fourth of revenue no doubt looks like a risk. The company’s hard-drive shipments in the previous quarter fell to 59.9 million from 71 million in the year-ago period. But, Western Digital is seeing strength in enterprise SSDs, and this was the reason it ramped up its orders from Marvell.

Profiting from next-gen storage
In June, Western Digital Corp (NASDAQ:WDC) announced that it would be acquiring sTec for $340 million to bolster its enterprise SSD business. According to AnandTech, STEC has more than 100 patents related to SSDs and this acquisition should further improve Western Digital’s position in this market, and Marvell in turn.

In addition, during the previous conference call, Western Digital management stated that the company’s non-PC business has grown from 35% of revenue to 50% in the last five years. This is yet another positive sign for Marvell since growth in non-PC related sales at its biggest customer will act as a hedge against the PC slump.

Research firm Gartner forecasts robust growth in hybrid disk drives going forward, with NAND flash usage in hybrid drives expected to increase an incredible 169 times by 2017. And this is where counting Seagate as a customer will help, since it is making efforts to penetrate this market aggressively.