Value in Systems on a Chip at Marvell Technology Group
Part of the secret to Warren Buffett’s success is that his Berkshire Hathaway Inc. (NYSE: BRK.A) does not buy the flashy or high profile companies. Instead, it invests in the companies that provide the things that other companies cannot do business without.
For example, Berkshire Hathaway completely owns the supply chain solution provider the McLane Company. You may not have heard of McLane, but you’ve probably seen its trucks in your town or neighborhood. They’re the company that supplies stores with everything they need. McLane drops the cigarettes and chewing gum off at your local gas station.
McLane’s customers include Wal-Mart, Sam’s Club, Walgreens, the Flying J truck stops, 7-Eleven, Target, and restaurants such as Taco Bell and Kentucky Fried Chicken. McLane provides the infrastructure that those retailers and restaurants need to survive.
Owning McLane allows Buffett to profit from retailers and fast food restaurants without taking the risk of directly investing in a retailer or fast food chain. He makes money no matter where people shop because every restaurant and retailer needs to be supplied. If the public suddenly stops eating at Taco Bell, Buffett does not have to worry because McLane can supply whatever replaces Taco Bell in the popular palate.
Obviously we cannot buy McLane shares, but we can invest in other infrastructure companies that service other industries. Infrastructure companies are a great value investment because they’re not glamorous or high profile; they don’t attract that much attention, which means they’re often undervalued even though they make money.
Today the most interesting infrastructure buys are in the Internet and technology sector. These sectors are much like retail; most investors concentrate on the big brands everybody sees, such as Google and Amazon.com, and ignore the companies that make the infrastructure the cloud runs on. Some of those companies have been doing real well lately.
Marvell Technology the Value in Cloud Infrastructure
A great little value play in that sector right now is Marvell Technology Group (NASDAQ: MRVL). Marvell has nothing to do with Marvel Entertainment, the comic book company turned movie studio that’s now part of Disney. Instead, it builds the processors that are the core of the infrastructure that powers the cloud. Without companies like Marvell, there would be no cloud.
For example, Marvell’s Armada PXA1088 chips power the Samsung Galaxy Tab 4. The Armada 1500 chips power HD video devices such as flat screen TV sets and streaming video. You might never have heard of Marvell, but there’s a good chance its processors might be in your home right now.
Marvell is also at the cutting edge; its Kimona Connect technology allows manufacturers to create Wi-Fi devices that can work with either Google Android or Apple iOS. Marvell Chips can power everything from broadband networks to printers.
These solutions provide the backbone of the servers that all Internet companies run upon. Marvell manufactures a variety of these devices, including packet processors for storage, Ethernet transceivers, and ARM chips that servers are built from. If you don’t understand how this stuff works, don’t worry; Marvell’s numbers look good.
On July 31, 2014, Marvell reported a TTM revenue of $3.78 billion up from $3.098 billion in July 2013. It also reported a gross profit margin of 50.32%, a profit margin of 14.44%, a payout ratio of 27.45%, and a return on equity of 9.43%. There was also a free cash flow of $139.83 million. Not bad for a company whose shares were trading at $13.14 on November 14, 2014.
If you’re looking for a value play in technology, Marvell Technology Group might just be it. It isn’t glamorous, but it seems to make money and profit off the cloud. Like Uncle Warren, you’ll be able to make money no matter what happens to the big names.
