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Marvell's a Winter Flop, Summer Flip

Richard Saintvilus

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Editor's note: Jim Cramer told viewers of his "Mad Money" TV show on Tuesday that Intuitive Surgical and Potash are two ugly ducklings set to become beautiful swans. Here's another stock with those same characteristics.

NEW YORK (TheStreet) -- At the beginning of the year, chip giant Marvell , which had dropped by more than 50% in 2012, was on my short list of ugly duckling companies that I felt could turn into swans. Not only did I sense that Marvell had been punished enough, but I felt -- with a little stroke of luck -- the stock could post unsuspecting gains.

Winter Flop, Summer Flip
MRVL data by YCharts

I figured, how much worse could things get? Since the clock struck midnight into 2013, this strategy has worked to perfection. Not only have shares of Marvell been up by as much as 63% on the year, but since the stock bottomed at $6.98 in December, Marvell is up closer to 70%. Now, investors are wondering how much better can things get?

That's the right question to ask, because this company is anything but a flawless operation.

I'm not suggesting that Marvell's direction is all downhill from here. But I do worry that investors who are risking additional gains from this level may get burned. Worse, they may end up roasting themselves.

Marvell's situation has many layers. Not only has the company been plagued by litigation, including having to pay $1.17 billion to Carnegie Mellon in a patent suit, but it has also been left behind by the likes of Qualcomm and Broadcom , which have chipped away at Marvell's strength in areas like mobile and wireless.

To complicate matters, in Marvell's core storage market, although the company is doing well, rivals such as LSI are ramping up products to stunt Marvell's turnaround potential. And I haven't even mentioned the uphill battle Marvell faces in areas like network processing, where (among others) Cisco is a force.

While these commercial clashes are going on, management still has to hold the pieces together in court battles. In that regard, it's remarkable that the company nevertheless managed to post decent results in its fiscal first quarter -- relatively speaking. Although revenue declined 8% year-over-year, it still managed to beat Street estimates by almost 2%. But it wasn't all good news.

Aside from a brutal PC environment, Marvell continues to be hurt by weakness in its mobile and wireless end-markets, which resulted in a 42% and 24% year-over-year revenue drop, respectively. I'm just speculating here, but in my attempts to connect the dots, I can't rule out that Marvell could have been stung by what was a much swifter decline in sales of BlackBerry's older model devices.

Although there is cause for optimism, given the recent launches of BlackBerry's Z10 and Q10 phones, early sales results are not overwhelming. That's not to say that Marvell can't still gain from just modest BB10 growth. But so far, the Street has not been overly impressed with BlackBerry sales. Accordingly, analysts have taken a wait-and-see attitude with BlackBerry, which reports earnings next week.

It wouldn't surprise me to see shares of Marvell inch higher if BlackBerry sales exceed expectations. But this is a risky proposition. Given the gains that Marvell has already posted this year, it just doesn't seem prudent. The best might have already arrived. Before you disagree, I think I did pretty well by timing the bottom when I did last December. This was when the Street was prepared to send Marvell to the glue factory.

Marvell's management deserves plenty of credit for having steered the company from the brink of collapse into a sea of growing margins. But truth be told, even though the company is no longer an ugly duckling, there's still too much that needs to go right for this stock to advance further.

Accordingly, I would advise moving on names like Intel and Nvidia , which present less risk and more upside potential. It doesn't have to be a case of feast or famine.

At the time of publication, the author held no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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