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Holly LaFon
Holly LaFon
Articles (8153) 

Will David Einhorn Buy Marvell Again as Price Drops Further?

October 24, 2012 | About:
David Einhorn makes few investing mistakes. Since he reported his second-quarter portfolio, only one of his stocks is cheaper today than when he bought it: Marvell Technology Group Ltd. (NASDAQ:MRVL). When the price declined 28 percent in the second quarter, Einhorn said he used it as “an opportunity to increase our stake in the company.” His colleague Daniel Loeb of Third Point, meanwhile, exited his position. As the stock continued a 19 percent slide in the third quarter (42 percent year to date), it left many to wonder if it is still the deal Einhorn thought it was.

The Company

Marvell is the 18th largest semiconductor company in the world by revenue, with 1.1 percent market share. It is a fables semiconductor company (meaning it relies on independent, third party contractors for manufacturing, assembly and test functions, allowing it to focus on product design, development and marketing and reducing investment capital for manufacturing) whose products include high-performance processors, storage controllers, LED processors and broadband and wireless transceivers.


In 2011, several natural disasters rocked Marvell’s supply chain for its hard disk drive (HDD) products: the earthquake in Japan early in the year, and flooding in Thailand later in the year. The two events combined impacted the company’s net revenue by approximately 10 percent that year, it estimated.

The monsoon flooding in Thailand, which began as early as May, had only begun to affect business in the third quarter of 2011. The company, which derived 82 percent of its revenue from sales to customers in Asia in 2010, noted in its 10-Q that it was seeing the initial impact to the supply chain for some of its larger customers at that point. The next quarter would be worse, it cautioned:

We currently expect overall net revenue for the three months ending January 28, 2012 to decline significantly as compared to the three months ended October 29, 2011 largely driven by the impact of the floods in Thailand on our hard drive business and seasonality in our consumer businesses.

Several months later on Jan. 27, flooding so disrupted business that the company issued a fourth quarter update in which it lowered net revenue expectations for the quarter to a range of $735 million to $745 million, from its previous outlook of $775 million to $825 million.

The supply of disk drives started to recover in our fourth fiscal quarter, but later than we had originally anticipated. Our SSD revenues grew more than expected but not enough to offset the impact of the Thailand floods on our HDD volumes, said Dr. Sehat Sutardja, Marvell's chairman and chief executive officer.

The CEO also cited year-end demand softness at its mobile and wireless customers, mostly in China, but did not believe the impact would be long term or affect fiscal year results.

Einhorn purchased about 16.64 million shares of Marvell in the third quarter of 2011 for $14 per share on average, and increased the position by almost 1 million shares in the next two quarters. In the second quarter of 2012, he made his second largest purchase of the company to date of more than 7 million shares, bringing his total holding to over 25 million shares.

Einhorn’s Thesis

Einhorn has spoken publicly about Marvell twice. Some of his initial predictions proved accurate.

According to Einhorn’s third quarter 2011 letter, some investors were wary of Marvell because Research In Motion (RIMM), the flailing Blackberry smartphone maker, was its largest customer. Einhorn wrote that the company could easily diversify its client base.

Marvell previously did not break down its revenue by client, but its largest customer accounted for 21 percent of revenue in the first half of 2011, with some speculating that this was RIM. By the first half of 2012, it named its largest customer as Western Digital, accounting for 16 percent of revenue, followed by Toshiba, accounting for 11 percent.

Furthermore, Einhorn expected Marvell to repurchase 12 percent of its stock in 2011. It ended up repurchasing approximately 14 percent of its shares outstanding in the six quarters leading up to year-end 2011.

Einhorn lastly said he disagreed with investors who believed flash memory (SSD) would replace HDD (one of Marvell’s biggest products), seeing “no sign” of HDD disappearing “any time soon.”

That quarter the company said in its 10-Q that it expected the Thailand floods to actually accelerate the move to advanced HDD technologies, where it is a leader. “We have strong market share of the HDD industry, and have executed well in our SSD development, and therefore we believe we are well positioned regardless of the future industry changes,” the company said. It also reported that it expected to double its SSD revenues in the fourth quarter compared to the fourth quarter the previous year.

In the company’s most recent quarter, ended July 28, 2012, Marvell’s revenue declined 9 percent year over year, with a slow-down in PC sales resulting in lower HDD sales being a primary cause, “despite the recovery of HDD manufacturing from the Thailand floods that occurred in October 2011,” the company said.

Second Comments

After increasing his holding by almost 4 million shares on July 16, 2012, for $10.37 per share on average, Einhorn commented again on Marvell in his second quarter letter, saying:

Marvell Technology Group (MRVL) was the other significant loser, as its shares fell from $15.73 to $11.28 during the quarter. MRVL gave tepid guidance and Wall Street has modestly reduced its estimates of earnings per share from $1.25 to $1.15 this year and from $1.45 to $1.40 for next year. MRVL has about $4 per share in cash and now trades at roughly 5x next year's earnings net of the cash on the balance sheet. Most of the cash is excess, and the company has commenced what we hope will be an aggressive share repurchase program. We have used the reduced stock price as an opportunity to increase our stake in the company.

The repurchase program Einhorn referred to was announced May 17 and involved an increase of up to an additional $500 million to its existing share repurchase program. The company had repurchased about 16 percent of its shares in the seven previous quarters, at that point. The program proved aggressive, as the company bought back 20 million shares in the next quarter for a cost of $250 million. This brought the total amount repurchased to 19 percent in the previous eight quarters.

Einhorn’s previous prediction regarding HDD and SDD drives proved less accurate this year. While HDD drives certainly have not disappeared, the company’s 9 percent revenue dip in the second quarter was due in part to weakness in its storage end markets due to the macroeconomic slowdown. SSD, 500 gigabyte per platter HDD grew double digits sequentially, however.

Weakness has continued in its HDD market. On Oct. 28, Marvell lowered its outlook for the fiscal third quarter to a range of $765 million to $785 million, from its prior outlook of $800 million to $850 million. One of the primary reasons it cited was a weaker PC market than it expected, resulting in soft demand for its HDD customers.


On a ratio basis, Marvell is even cheaper now than when Einhorn bought it. In addition to its price, its P/E, P/B and P/S ratios are all close to or at their three-year lows:


MRVL data byGuruFocus.com

Though Einhorn bought more Marvell shares on a price drop earlier this year and most of his expectations have been met, it is unclear whether he will buy more after its 42 percent year-to-date decline and as weakness in the PC market persists.

See David Einhorn’s portfolio here. Also check out the undervalued stocks, top growth companies and high yield stocks of David Einhorn.

Rating: 4.2/5 (23 votes)


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