Three Risks Marvell Technology Group Ltd. (MRVL) Faces In The Year Ahead

Marvell is highly dependent on several customers for a majority of its revenues

During the fiscal year ended Jan. 29, 2011, 14% of Marvell’s net revenues came from Research In Motion Ltd (NASDAQ:BBRY). Declining Blackberry sales caused more than a hiccup at Marvell Technology Group Ltd. (NASDAQ:MRVL). The struggling smart-phone maker no longer comprises more than 10% of Marvell’s revenues, but this exemplifies just how quickly fortunes can change in this industry.

Although the company creates integrated circuits found in a wide variety of products, most of the company’s revenues are still dependent on hard drive sales. Recent consolidation of the hard drive industry into two main players makes Marvell’s situation even more precarious.

During fiscal 2012, Seagate Technology PLC (NASDAQ:STX) acquired Samsung ‘s hard drive operations. If that acquisition had occurred at the beginning of Marvell’s FY 2012, Seagate would have comprised 11% of Marvell’s net revenues for that year. Similarly, Western Digital Corp. (NASDAQ:WDC) acquired Hitachi‘s hard drive operations near the end of FY 2012. If the Hitachi acquisition had occurred at the beginning of FY 2012, Western Digital would have comprised 24% of Marvell’s net revenues for that year.

It’s no secret that the traditional hard drive industry has fallen on hard times. Personally, I think that Western Digital is oversold, and represents a strong value opportunity. The hard drive maker is currently trading at about 1.3 times its book value and has a very strong balance sheet. The well-managed company recently posted impressive fourth quarter results, which included a unit shipment gain of 108% year on year. Nevertheless, if either Western Digital or Seagate decide to drop Marvell Technology Group Ltd. (NASDAQ:MRVL), the results would be disastrous.

Transitioning from traditional PC hardware to mobile

Although most of you reading this in the US are well into 4G and even 4G LTE, most of China is just getting it’s first taste of 3G. Now the world’s largest wireless carrier, China Mobile Ltd. (ADR) (NYSE:CHL), boasts over 714 million subscribers, and nearly 95 million of those are 3G users. Unlike most carriers that use WCDMA, China Mobile uses TD-SCDMA technology. Marvell is desperately trying to carve out a top spot in the smart-phone applications processor field, and its relationship with China Mobile will likely become instrumental in the company’s transition from hard drive applications to mobile applications processors.