Have Shares of Marvell Technology Group Peaked?

Marvell-Technology-Group-MRVL-stock

Marvell Technology Group (NASDAQ:MRVL) has always been a trader’s stock. It has high points and low points and when well timed, can be played either long or short. Who is Marvell? This company designs, develops, and markets analog, mixed-signal, digital signal processing, and embedded and standalone ARM-based integrated circuits.

It offers mobile and wireless products comprising communications and applications processors; thin modems; Wi-Fi products, as well as multi-function system-on-a-chips (SoCs), which incorporate multiple wireless communications protocols, including Wi-Fi, Bluetooth, NFC and FM, delivered on a single chip; and mobile computing products.

The company also provides a range of integrated data storage products, such as hard disk drive, solid-state drive, and solid state hybrid drive controllers, as well as storage-system products. In addition, it offers networking products comprising cloud infrastructure and service provider infrastructure.

Further, the company provides smart home that are designed to enable the next generation of connected consumer platforms, and to enhance the eco-friendy and connected lifestyle throughout the home, ranging from broadband access, home networking, home entertainment, and home automation. It operates in the United States, Canada, China, India, Israel, Italy, Japan, Malaysia, Singapore, South Korea, Spain, Sweden, Switzerland, and Taiwan.

To understand where we are in the trading cycle, it is prudent to analyze the company’s performance. Revenue for the first quarter of fiscal 2015 was $958 million, an increase of 3 percent from $932 million in the fourth quarter of fiscal 2014, ended February 1, and a 30 percent increase from revenue of $734 million in the first quarter of fiscal 2014, ended May 4, 2013.

GAAP net income for the first quarter of fiscal 2015 was $99 million, or $0.19 per share (diluted), compared with GAAP net income of $97 million, or $0.19 per share (diluted), for the fourth quarter of fiscal 2014, and $53 million, or $0.11 per share (diluted), for the first quarter of fiscal 2014. Non-GAAP net income was $144 million, or $0.27 per share (diluted), for the first quarter of fiscal 2015, compared with non-GAAP net income of $151 million, or $0.29 per share (diluted), for the fourth quarter of fiscal 2014 and $98 million, or $0.19 per share (diluted), for the first quarter of fiscal 2014.

Cash flow from operations for the first quarter of fiscal 2015 was $235 million, compared to the $100 million reported in the fourth quarter of fiscal 2014 and the $84 million reported in the first quarter of fiscal 2014. Free cash flow for the first quarter of fiscal 2015 was $211 million, compared to the $82 million reported in the fourth quarter of fiscal 2014 and the $53 million reported in the first quarter of fiscal 2014.

Free cash flow is defined as cash flow from operations, less capital expenditures and purchases of technology licenses reported under investing and financing activities in the consolidated statement of cash flows. Marvell also paid a quarterly dividend of $0.06 per share on March 27 to all shareholders of record as of March 13. Marvell intends to pay its next quarterly dividend of $0.06 per share on July 2, 2014 to all shareholders of record as of June 12.

Dr. Sehat Sutardja, Marvell’s Chairman and CEO, stated, “We delivered solid first quarter results, driven by better than expected demand for our LTE solutions. Looking forward, we continue to focus on increasing our share across all our end markets and are investing appropriately in advanced technologies that will drive our success.”

So where is Marvell going from here? Revenue for the second quarter is expected to be in the range of $940 to $980 million. Gross margin is expected to be in the range of 49.7% +/- 100 bps. Operating Expenses are expected to be in the range of $365 million +/- $10 million. Thus earnings per share are likely to come in around $0.21. Note that thisfinancial outlook does not include the potential impact of future share repurchases, pending litigation matters, business combinations, asset acquisitions or other investments that may be completed after May 3, 2014.

All things considered here, Marvell is sitting near the top of its fifty-two-week range. While the company expects to have a decent second quarter, history shows that reality doesn’t always meet expectations for this company. Given that this has long been a trader’s stock, the fact that the stock is near a fifty-two-week high, and is expensive at a 27 price-to-earnings multiple, I think shares have hit a short-term peak and are likely to pull back to their fair value price of $12.50.

Disclosure: Christopher F. Davis holds no position in Marvell but may initiate a short position in the next 72 hours. He has an underweight rating on the stock and a $12.50 price target.

More From Wall St. Cheat Sheet: