Infrastructure
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3/4/2003
02:07 PM
William Schaff
William Schaff
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Taking Stock: Marvell Thrives While Others Wither

The company faces increased competition from Intel and others

Not all tech companies suffered greatly from the recent downturn in IT spending. One company that has prospered during the last three years is Marvell Technology Group. The company recently reported quite-impressive quarterly results.

Marvell focuses primarily on two market segments: storage and communications. Each accounts for about half of its revenue, which was $168.3 million during the latest quarter. The communications segment focuses on designing and marketing chips for hard-disk drives. Usually these chips read data, but new ones also address other hard-disk-drive control functions. Customers include Hitachi, Seagate, Toshiba, and Western Digital. The Western Digital relationship should contribute to growth in the next few quarters as volume grows for semiconductors already in products and as Marvell displaces competitors. Also, the technological transition from a parallel architecture to a serial one, called serial ATA, used in a variety of storage devices, should promote growth.

Disk drives increasingly are being used in non-PC settings. Several markets promise to be solid growth opportunities for the company, in particular consumer electronics. Hard-disk drives are critical to the TiVo digital video recorder, Apple's iPod, and automotive applications.

Marvell's other segment, communications, is focused on Gigabit Ethernet and 10 Gigabit Ethernet. Ethernet is the dominant standard for local area networks, and most offices have Fast Ethernet, which runs at 100 Mbps. In comparison, Gigabit Ethernet is 10 times faster, and 10 Gigabit Ethernet is 10 times faster than that. The company estimates that Gigabit Ethernet has penetrated about 30% of offices, and that share continues to rise. Marvell makes chips for both PCs and switches. Intel is a big customer of Gigabit Ethernet chips, while Marvell has had several chips chosen for use in 3Com and Nortel Networks products. The communications segment also includes some semiconductors for wireless LANs, which both Linksys and Netgear use in their consumer products. However, Marvell has only an 802.11b offering and won't have an 802.11g version until later this year.

Revenue growth last quarter was stronger than expected, rising 70% from a year ago and 12% from the previous quarter. On top of this, the company increased sales forecasts for the current fiscal year.

Marvell has several big risks. Customer concentration is always a concern, and, in this case, Intel accounted for 18% of fiscal 2003 revenue, Samsung 17%, and Hitachi, Seagate, and Toshiba each roughly 10% to 11%. The biggest problem could be increasing competition. Intel, a big customer of Marvell's Gigabit Ethernet offering, is also developing and marketing its own product, which could displace Marvell's. Also, Agere, Broadcom, and ST Microelectronics have designed semiconductors for similar applications. The hard-disk market continues to be closely tied to spending on PCs, implying that a slowdown in this area could lead to a slowdown in Marvell's revenue growth.

Marvell's stock is trading at 28.5 times estimated 2003 earnings per share. This isn't a wildly inflated valuation given the growth prospects, but there's probably not much room left for appreciation in the near term when one considers the various risks.

William Schaff is chief investment officer at Bay Isle Financial LLC, which manages the InformationWeek 100 Stock Index. Reach him at bschaff@bayisle.com.

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