UBS And B. Riley Are Selling Marvell

• Marvell Technology Group Ltd. MRVL shares have declined 45.4 percent year to date, with a 16 percent decline over the past trading day.
• UBS’ Stephen Chin has downgraded the rating on the company from Neutral to Sell, while lowering the price target from $9.10 to $6.00. Craig A. Ellis of B. Riley has also downgraded the rating from Neutral to Sell, while lowering the price target from $10 to $7.
• While Chine expressed concern regarding the company’s SSD controller and WiFi connectivity chip sales, Ellis mentioned that PricewaterhouseCoopers had resigned as Marvell Technology’s lead auditor.

Sales To Decline

Analyst Stephen Chin believes that the acquisition of SanDisk Corporation SNDK by Western Digital Corp WDC could impact Marvell Technology’s storage sales.

“Given that SanDisk is one of Marvell's biggest SSD chip customers, we are now more concerned that Western Digital could use lower cost SSD controllers from Asia suppliers or possibly develop its own SSD controller ASIC chips instead of buying from Marvell,” Chin mentioned.

On the other hand, there is expected to be limited visibility regarding WiFi chip sales in the near term, following the recent restructuring at the company.

However, Chin views “Marvell's recent decision to restructure its mobile business positively as its smartphone SoC chip business only had a gross margin of 11 percent and it is taking $220M out of expenses.”

In addition, while the resignation of PricewaterhouseCoopers (PwC) as the company’s auditor is a near term concern, Chin expects Marvell Technology to “sign up a new auditor and report a full quarterly results soon,” which would prove to be a positive catalyst.

Auditor Resigns

Analyst Craig Ellis mentioned that the company has disclosed during its October 26 AMC that “PwC proactively resigned as lead auditor and concurrently recommended four accounting review items.”

Management expressed surprise at the resignation, while acknowledging that “half of the new recommendations are incremental to an in-progress inquiry,” Ellis said, while stating that management mentioned that “ultimate resolution may include executive or board changes” and that the company would “move quickly to identify a new auditor.”

However, Ellis expressed concern that the inquiry was significantly broadening and that the board audit committee would need to sign off before a new auditor could be signed on, as well as whether Marvell Technology would be able to publish its 2Q16 audited financial results within the 180 and 360 days windows in order to retain its listing on NASDAQ.

“More broadly, our experience suggests there are meaningful incremental costs to these inquiries. MRVL was unable to quantify the scope but we estimate ~$10.0MM/qtr,” Ellis added.