Is the Worst Over for the Marvell Technology Group (MRVL)? XSD, SOXX & SOXL

There appears to be light at the end of the tunnel for mid cap fabless semiconductor stock Marvell Technology Group Ltd (NASDAQ: MRVL) despite the fact that the company has lost a patent infringement battle with Carnegie Mellon University that could cost it $1.54 billion, meaning its worth taking a closer look at the stock along with the performance of semiconductor ETF benchmarks like SPDR S&P Semiconductor ETF (NYSEARCA: XSD), iShares PHLX SOX Semiconductor Sector (NASDAQ: SOXX) and Direxion Daily Semiconductor Bull 3X Shares (NYSEARCA: SOXL).

What Are Fabless Semiconductor Stocks and What is Marvell Technology Group?

The fabless model refers to the business model of outsourcing the manufacturing of silicon wafers with most semiconductor companies actually being fabless because of the high cost for a company to build their own manufacturing fab. Hence, these companies can concentrate on the design and marketing of chips while outsourcing the production to larger foundry companies.

Founded in 1995, mid cap Marvell Technology Group is a leading fabless semiconductor company that ships over one billion chips a year and has international design centers located in China, Europe, Hong Kong, India, Israel, Japan, Malaysia, Singapore, Taiwan and the US. Specifically, Marvell Technology Group's expertise in microprocessor architecture and digital signal processing, drives multiple platforms including high volume storage solutions, mobile and wireless, networking, consumer and green products.

As for potential performance peers, the SPDR S&P Semiconductor ETF tracks the S&P Semiconductor Select Industry Index through approximately 51 holdings; the iShares PHLX SOX Semiconductor Sector tracks the PHLX SOX Semiconductor Sector Index through 31 holdings; and the Direxion Daily Semiconductor Bull 3X Shares seeks a return that is 300% of the PHLX SOX Semiconductor Sector Index though the use of leverage.

What You Need to Know or Be Warned About Marvell Technology Group

On April 1, Marvell Technology Group announced that the United States District Court for the Western District of Pennsylvania issued its judgment on the remaining motions in a lawsuit brought by Carnegie Mellon University (which claimed that at least nine Marvell circuit devices incorporated university owned patents, letting the company sell billions of chips without permission). Based on these decisions, the Court calculated the damages to Carnegie Mellon University, including enhancement, to total approximately $1.54 billion. Once a final judgment is entered, Marvell Technology Group intends to immediately appeal to the Federal Circuit Court of Appeals, but the company noted that it has reached out to sureties who have indicated that they are willing to provide a bond without requiring Marvell to post collateral or otherwise harm its operations. 

Reuters noted that the payout is equal to 1.23 times the sum of the original $1.17 billion jury verdict (the third-largest in US patent litigation since 1995 according to PricewaterhouseCoopers in a June 2013 study)from December 2012, plus $79.6 million in damages for alleged infringements that the jury did not consider because it lacked recent financial information at the time. However, the judge also rejected the university's requests for double or triple damages that could have boosted the award to $3.75 billion because it would "severely prejudice" Marvell and perhaps threaten its survival.

Back in mid February, the Marvell Technology Group announced fourth fiscal quarter and fiscal year 2014 earnings results with fourth quarter revenues rising 20% year over year to $932 million and GAAP net income coming in at $107 million verses $50 million while full year revenues rose 7% to $3.4 billion and net income came in at $325 million verses $307 million. The Chairman/CEO commented:

"Fiscal year 2014 was the start of a turnaround for Marvell as we delivered year over year growth in revenue and profits. We made good progress in a number of critical areas during the year. We are investing in advanced technologies that will help drive increased business opportunities and continued revenue and profit growth in all of our target end markets."

However and in the earnings call (which is available on Seeking Alpha here), management commented that the mobile business saw softer-than-initially-expected results, mainly due to product launch delays from some of customers. Nevertheless, management expects demand for mobile products to return to normal in the current quarter with the Chairman commenting: "…we are now well positioned to deliver strong growth in fiscal 2015."

Otherwise, it should be mentioned that Marvell Technology Group has a trailing P/E of 25.08 and a forward P/E of 13.39 along with s forward dividend of $0.24 for a 1.5% dividend yield and a 38% payout ratio. However, the last earnings report did note that:

Developments in on-going litigation could affect Marvell's ability to pay the dividend on March 27, 2014 under Bermuda law, where Marvell is incorporated. In such an event, the dividend payment could be delayed until such time as Marvell can meet statutory requirements under Bermuda law.

Share Performance: Marvell Technology Group vs. XSD, SOXX vs. SOXL

On Monday, mid cap Marvell Technology Group rose 1.22% to $15.80 (MRVL has a 52 week trading range of $9.46 to $16.65 a share) for a market cap of $7.95 billion plus the stock is up 14.8% since the start of the year, up 62.3% over the past year and up 51.6% over the past five years. Here is a look at the performance of Marvell Technology Group verses that of SPDR S&P Semiconductor ETF, iShares PHLX SOX Semiconductor Sector and Direxion Daily Semiconductor Bull 3X Shares: 

As you can see from the above chart, Marvell Technology Group started to underperform ETF benchmarks like the SPDR S&P Semiconductor ETF, iShares PHLX SOX Semiconductor Sector and Direxion Daily Semiconductor Bull 3X Shares in late 2012.

Finally, here is a look at the latest technical charts for all four semiconductor investments:

The Bottom Line. Although its underperformed key semiconductor ETF benchmarks in recent years, mid cap Marvell Technology Group id definitely worth a closer look as it puts litigation behind it.