Marvell Downgraded to Strong Sell: Time to Offload It?
On Jan 16, 2016, Zacks Investment Research downgraded Marvell Technology Group Ltd. MRVL to a Zacks Rank #5 (Strong Sell). Going by the Zacks model, companies holding a Zacks Rank #5 are likely to underperform the broader market.
Most of the estimates for this semiconductor chipmaker have been moving downward since it reported lower-than-expected preliminary third-quarter fiscal 2016 results on Dec 7, 2015.
Why the Downgrade?
The company reported preliminary third quarter fiscal 2016 adjusted loss (including stock-based compensation but excluding amortization, acquisition, restructuring and legal related expenses) of 1 cent per share. The preliminary figure compares unfavorably with the Zacks Consensus Estimate of earnings of 9 cents per share. Also, the preliminary bottom line figure compares unfavorably with earnings of 23 cents reported in the year-ago quarter, mainly due to a lower revenue base.
Marvell’s revenues fell 27.5% year over year to $674.1 million. The preliminary figure fell short of the Zacks Consensus Estimate of $729 million. The company blamed softer-than-expected demand from storage end markets as well as lower revenues from its networking business for the weak top line performance.
Also, Marvell’s adjusted gross profit came in at $307.9 million, down 34.8% on a year-over-year basis. Gross margin contracted 506 basis points (bps) on a year-over-year basis to 45.7%, primarily due to unfavorable product mix and lower revenue base.
It is worth mentioning, Levi & Korsinsky, a national law firm, recently launched an investigation against Marvell for possible violations of the Federal Securities Laws. The litigation and internal accounting and controls investigations would remain a headwind for the company.
Moreover, from a valuation perspective, the stock looks very unattractive as it currently trades significantly higher than the industry average based on a forward earnings estimate which signifies a huge downward potential. Marvell currently trades at a forward P/E of 51.59x as against the industry group average of 25.00x.
A dull performance in third quarter 2016 and a dismal overall trend resulted in downward estimate revisions for Marvell. Over the last 60 days, five out of six estimates were revised downward for fiscal 2016. The Zacks Consensus Estimate declined 52.9% to 16 cents per share over the same time frame.
Furthermore, competition in the semiconductor market from major players such as Intel Corp. INTC and Texas Instruments Inc. TXN remains a headwind.
Stocks to Consider
Not all technology stocks are performing as poorly as Marvell. NVIDIA Corporation NVDA is a better-ranked stock, sporting a Zacks Rank #1 (Strong Buy).
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MARVELL TECH GP (MRVL): Free Stock Analysis Report
INTEL CORP (INTC): Free Stock Analysis Report
TEXAS INSTRS (TXN): Free Stock Analysis Report
NVIDIA CORP (NVDA): Free Stock Analysis Report
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