This Wireless Chip Champ Must Nail a High-Wire Balancing Act

Shares of Marvell Technology (NAS: MRVL) have plunged 26% over the past six months. The slide wasn't even slowed down by Marvell's beating analyst targets all around in May's first-quarter report. Analysts are worried that Marvell is shifting its product mix to less profitable low-cost markets, which would be bad for its financial health. Investors are listening.

The company has teed up its second-quarter report for the waning hours of this Thursday. Will Marvell be able to show the doubters wrong?

Five Wall Street firms have lowered their third-quarter earnings targets over the last month, landing at a consensus of $0.26 per share. That's down from the $0.38 per share that Marvell reported a year ago. On the top line, sales are expected to slide 5% year over year to $853 million.

These targets sit below the midpoints of management guidance, which work out to $0.28 per share and $865 million, respectively. The company assumes that Chinese growth will lead the way to these results, spearheaded by smartphone radio chips for China Mobile's (NYS: CHL) TD-SCDMA wireless data standard.

The Chinese opportunity is for real, but it's hardly a walk in the park. Marvell faces intense competition for every handset design from local hero Spreadtrum Communications (NAS: SPRD) . Moreover, global chip giant Qualcomm (NAS: QCOM) is increasing its investment in TD-SCDMA technologies. This industry giant will pose a huge challenge if it jumps into China with both feet. It's only a matter of time, really.

So there's some fuel for the bearish fires. Bulls will assume that Marvell gains share in the TD-SCDMA market and will also point to the stock looking incredibly cheap right now. Marvell shares are priced for disaster at just 8 times forward earnings and a very reasonable enterprise value-over-EBITDA ratio of 6.5.

So the key to halting the long, painful pricing plunge of Marvell's shares, then, rests in the Chinese market. If Marvell beats sales estimates this time, its growth engines will be full of TD-SCDMA chips. But given the low-cost nature of these products, a big beat there could actually hurt Marvell's profit margins and bottom-line income. It's a high-wire balancing act.

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