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Activist investor Starboard Value has its latest target. It has a 6.7% stake in Marvell Technology (NASDAQ: MRVL), a battered and cheap tech stock.
Marvell shares are down 50% over the last year and off more than 75% from their all-time high in 2006. Marvell, a fabless semiconductor manufacturer, has been rocked with an accounting scandal.
But has the selloff of the technology stock been overdone? Starboard Value certainly thinks so. Its thesis is that the company needs to revamp its margins.
Cheap Tech Stock Has a Big Overhang
The accounting issues at hand involve charges the company has been recognizing revenues earlier than it should ̶ roughly 8% of revenues.
Marvell’s founder and CEO have been accused of making false and misleading statements to shareholders and its external accounting firm resigned after questioning Marvell’s process for taking reserves to cover litigation and royalty expenses. But things sound a lot worse than they actually are.
Marvell also still has the overhang of litigation with Carnegie Mellon University over patent infringement. Carnegie was seeking $1.5 billion, but was only awarded $300 million. However, this has likely been baked into the stock and only puts a small dent in Marvell’s $2.3 billion cash hoard.
In addition to the accounting investigation, Marvell and is also dealing with slowing demand in personal computers. This is a fundamental issue, as the company’s chips are used for storage and networking devices and personal computers. And the decline in the PC market has led to two major earnings misses. However, some analysts believe PC sales could be bottoming as PCs remain king in the workplace.
Starboard Moves In
Starboard Value has been an energized activist investor over the last couple years, targeting companies including Macy’s (NYSE: M) and Yahoo (NASDAQ: YHOO). One of Starboard’s highest profile “wins” was at Darden Restaurants (NYSE: DRI), where it overthrew the board of directors and convinced the company to spin off its real estate.
Starboard’s involvement with Marvell could be cutting costs and helping the company boost margins. This should help offset demand declines. But the company’s strong cash position means returns to shareholders could also increase in the form of dividends and buybacks.
Starboard may also be aiming for corporate governance changes that could help instill confidence in the company. Two of Marvell’s largest shareholders are its founder and CEO Sehat Sutardja and his brother. Sutardja’s wife, Weili Dai, is Marvell’s president.
Last, but not least, Starboard could push for a buyout of Marvell Technology. The activist hedge fund has been involved in semiconductor buyouts in the past, including a buyout at Integrated Silicon Solution.
On an earnings basis, Marvell hasn’t returned to normalcy, so earnings are running negative. But based on other metrics, such as price-to-sales and price-to-cash, Marvell looks cheap.
Shares of Intel (NASDAQ: INTC), Texas Instruments (NASDAQ: TXN) and NVIDIA (NASDAQ: NVDA) all trade at P/S ratios of above 2.5 times and P/C ratios of greater than 3 times. Marvell trades at 1.4 times sales and 1.8 times cash.
In the end, Marvell shares offer a 2.8% dividend yield. The company has a solid balance sheet with no debt. Assuming PC and storage sales are stabilizing to some degree, Marvell looks interesting at these levels.
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