Inside Wall Street: Looking for a Savvy Smartphone Pick? Dial Marvell Technology

Technology is likely to be Wall Street's next focus even as stock market volatility appears to be back -- and spooking investors once more. Some pros are increasingly getting warmed up again about technology stocks, thanks in large measure to Intel's (INTC) robust second-quarter results, propelled by the pickup in demand for PCs and increasing corporate spending on tech updates and new equipment. So it could be a mistake not to heed the latest bullish tech signals.

However, since tech is such a vast field with lots of fast-moving parts, choosing which segments to bet on is tough. One basic premise investors should keep in mind is to invest in companies that show solid potential for strong growth -- and whose valuation continues to be underwater.

Smartphones would be a good lead in that regard. More than just being fancier cell phones, smartphones have become a necessity in daily life. So, any company closely linked to this category has growth as its ally. One such enterprise is Marvell Technology (MRVL), and even better for investors, it's valuation is in the cellar. The reason it could be a good bet now: Its chipsets are favored components in practically all mobile handsets and other hand-held consumer electronics, including Research in Motion's (RIMM) BlackBerry, Apple's (AAPL) iPhone and iPad, Amazon's (AMZN) Kindle and other companies' e-readers, Sony's gaming devices and China Mobile's (CHL) new Ophone smartphones.

Starting to Creep Up

Surprisingly, for a pivotal company that designs and makes integrated circuits and control processors for data storage, transition and management in personal computers and consumer electronics, mainly hand-held devices, Marvell still suffers from investor neglect. Apple, Hewlett-Packard (HPQ), and Microsoft (MSFT) seem to dominate the tech magic circle.

Marvell has tumbled to $15 a share in early July from a 52-week high of $36 in early 2006. But thanks to the attention it's getting lately due to the growing buzz over wireless gadgets and smartphones, Marvell shares have started to creep up, to more than $16 a share.

"Marvell is one of the better ways to play technology in part because 20% of its revenues come from the smartphones, and it continues to win new contracts from the major players," says Dan Chung, chief executive of Fred Alger Management. As an example, Marvell's microchips are in almost all of RIM's BlackBerrys, and its share of the BlackBerry business is expected to jump to 70% next year from 40% now.

Marvell's incursion into the smartphone world is something new. Two years ago, it didn't have any of that market, says Chung. So clearly, that's where new growth is coming from, and it should continue to be a strong source of sales and earnings for quite some time, he adds.

Sales and Earnings Jumps Are Coming

By 2012, some 50% of Marvell's yearly sales growth could come from RIM alone, predicts Nicholas Aberle, analyst at investment firm Janney Capital Markets, who rates the stock a buy. Marvell's market-share gain "represents a company-specific catalyst that should generate above-market growth for the company," says Aberle.

The analyst believes that as a result, sales and earnings growth will start revving up. He forecasts earnings will jump to $1.65 in fiscal 2011 ending Jan. 31, on revenues of $3.73 billion, and increase further to $1.85 in fiscal 2012 on $4.15 billion, up from fiscal 2010's 99 cents on sales of $2.80 billion. The potential growth in new orders isn't yet reflected in the stock's current price, says Aberle. He puts its fair market value at $27 a share.

Analyst Kevin Cassidy of investment firm Stifel Nicolaus says the stock's currently unjustified depressed valuation "is an opportunity to build an investment position in Marvell while it's in the early stages of a new product and growth cycle." Cassidy rates the stock a buy, with a higher price target of $28 a share. A $16 a share, it's trading at just less than nine times his 2012 profit forecast of $1.72. His $28 price target is equal to a price-earnings ratio of 16, which the analyst figures is what Marvell deserves.,

Having achieved a "solid operating model with roughly 30% operating margin, we believe new product ramps should allow for more diversified growth," says Cassidy." He notes that Marvell has good exposure to some new growth areas, such as smartphones, tablet computers like Apple's iPad, Internet-connected TVs and other hand-held consumer devices.

Selling 1 Billion Chips a Year

Marvell's recent growth has been led by its core business of providing hard disk drives as PC demand picks up, he notes. But new growth is coming from the mobile and wireless markets, where revenues have jumped 18% sequentially in April and are projected to advance by 25% in July. Right now, Marvell ships or sells more than 1 billion chips a year. In sum, says Cassidy, Marvell "has the capacity to generate a sustainable yearly revenue growth rate of 20%.

Indeed, Marvell appears to be the stock to snap up in the fast-moving tech world -- and if you do opt for it, you'd be in good company with institutional shareholders such as T. Rowe Price, Fidelity Management, Vanguard Group and BlackRock. The stock is still inexpensive based on its attractive growth profile, mainly coming from the accelerating demand for the ubiquitous smartphones and other handy electronic hand-held devices.