Why Marvell is Still Marvelous

By Eric J. Savitz
Barron's Online

IN A Q&A TWO YEARS AGO ("Valley Pearls," May 10, 2004), tech hedge-fund manager Doug Whitman argued that there were bargains amid the high-priced merchandise of Silicon Valley. He was right: The Nasdaq Composite, for instance, has since gained about 200 points, or 10.7%. At the time, he also provided nine stock picks. On average, those choices have returned about 20%-about twice the Nasdaq's solid subsequent return.

Not too shabby. I recently re-interviewed Whitman, proprietor of the Palo Alto, Calif. hedge fund Whitman Capital for "Picks," a feature on my new Tech Trader Daily blog, which you can find at blogs.barrons.com (no subscription required!). Two years later, his first pick is still Marvell Technology Group (ticker: MRVL), a chip maker that provides parts for hot consumer devices like MP3 players, game consoles and wireless routers.

Last week, Marvell announced a $600 million deal to buy Intel's (INTC) communications and application-processor business, which supplies components for handheld devices to Research in Motion, Palm and others. The market cut Marvell's market cap by 18%, or nearly $3 billion, on fears it won't be able to fix an unprofitable business and that the deal will dilute earnings.

I called Whitman back after the deal emerged, and found that he thinks Marvell will make a success of it and that the price-drop offers an attractive entry point to buy shares in a company that is growing far faster than the chip market.

Excluding the acquisition, its sales are expected to hit $2.4 billion in the January 2007 fiscal year, up from $1.7 billion in fiscal 2006. Despite doubling since our chat two years ago, the stock, Whitman points out, has dropped about $30 this year, to roughly 45. With Marvell forecast to earn $1.90 a share in the year ending January 2008, he says, the stock is "very reasonably priced" at 23.7 times earnings.

Whitman also likes the prospects for another stock he picked last time: cordless phone component maker DSP Group (DSPG), which is about flat over the last two years. After backing out the cash position that accounts for about half of its market cap, he notes, it trades for just 12 times expected 2006 earnings of $1.20 a share.

His final pick is a new name: VA Software (LNUX), a company best known for its insane run-up on the day it went public in 1999 as VA Linux. Once a hardware maker, it is now focused on Linux-related software and some geeky online-media assets, including the original user-created news site, Slashdot. Whitman thinks a bigger media company will buy it.

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