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.
|Period||Shares owned||% change|
|3Q 2011||16.64 million||n/a|
|4Q 2011||17.37 million||4%|
|1Q 2012||18.37 million||6%|
|2Q 2012||25.6 million||39%|
|3Q 2012||32.7 million||28%|
|4Q 2012||51.8 million||58%|
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 portfolio…
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 Mobile.
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 abroad.
The highlights for Marvell gets better, as the stock is also trading on the cheap, especially when compared to notable comps.
|Price to FCF||9.7||13.2||18.4||77.5|
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 shares.
- During fourth quarter 2012, Einhorn upped his in Marvell by 58%.
- 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 2012.
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 flow.
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.