market folly

We're posting up notes from the Capitalize For Kids 2018 investment conference.  Next up is Jeff Smith of Starboard Value who pitched a long of Marvell Technology Group (MRVL).  They added to the position recently and filed.


Jeff Smith's Capitalize For Kids Presentation: Long Marvell Technology Group

•    Semi co. Acquired Cavium in July 2018
•    Half their biz in storage, half in networking
•    Both are growing, both are well positioned
•    #1, or #2 in almost every key market
•    What SB has done with Marvell
•    114% underperformance vs peers over 5 years pre-SB
•    Options backdating, 8 CFOs 8 years. Accounting investigation, auditor resignation
•    Loved the business was great, Marvell’s customers wanted them to succeed
•    Entire board and management changed since 2016. Just a settlement, not a proxy. More than half the board replaced via settlement, rest turned over after
•    New management and CFO
•    Revenue shrunk, now its growing
•    Gross margins shrunk, now record highs
•    Op margins shrunk dramatically, now op margins at record highs
•    Stock has 2x’d since first 13D filing
•    Only partially closed underinvestment gap, still below index returns, gap is widening in underperformance
•    Why now? The acquisition positions it well for 5G and internet megatrend.
•    Now has complete solution in enterprise Cloud data centre and service provider. Now Marvell can compete with Broadcom, who was the only complete solution. Customers want them to compete and be strong against Broadcom
•    Trades below unaffected deal price

•    What’s changed?
o    Concerns around Cavium’s growth trajectory and inventory destocking
o    Fear related to Marvell’s end markets
o    Macro concerns, tariffs etc
o    10%+ FCF yield

•    Inventory sell down and 4G lag before 5G buildup has temporarily impacted growth rate
•    Cavium taking share in these end markets
•    Went from consumer products biz, now infrastructure end markets (data centres, etc)
•    Storage concern - Hard disk drives secular declines.
o    Great profitable biz in slow declineo    Hard drive for notebooks only 7% of Marvell’s revs
o    Storage biz as a whole now focused more datacentres and Edge / Other internet
o    Desktop / notebook is only 20% today
o    Data centre still a share gainer

•    Networking biz - all are share gainers in high growth markets
o    Wi-fi
o    ARM
o    EDGE
o    Ethernet
o    Data centre
o    5G

•    Not included in LT Financial Model
o    Not included 5G, Revenue synergies on deal, or ARM server processors. So not accounting for the revenue growth for the above
o    However, they are accounting for all the costs

•    Thinks management is credible, killed their guidance. Implying that they sandbag guidance very hard.
•    Goes through earnings guidance and earnings and were all big beats
•    R&D is higher than their peers. Still thinks it is a solid investment in product that will payoff
•    Put managers in place, thinks they are making very responsible investments, that should allow them to continue to beat earnings

•    Either get that revenue, or those R&D costs will come out.
o    —> earnings $2+/shr. 8x earnings today
o    Trades dramatically below their peers on most metrics.
•    Company in the market buying stock, $1b+ buyback program
•    Still excited about this idea


Be sure to check out the rest of the presentations from Capitalize For Kids 2018.