Morgan Stanley Upgrades Marvell, Notes Better Risk-Reward

In a report published Tuesday, Morgan Stanley analysts upgraded the rating on

from Equal-weight to Overweight. The price target was raised from $15.00 to $17.50. The analysts believe that the stock's risk/reward profile has become more positive. Following the decline in the share price after Friday's sell off, the stock appears reasonably values, given the EPS expectations for 2015 and 2016. However, the analysts expect Marvell Technology's heavy investment in wireless baseband to lead to GAAP EPS losses in 2015 and 2016. "If the company were to divest the wireless business, or otherwise drive it to breakeven, earnings would climb," as would the stock, the analysts said. The management's willingness to be more flexible in reducing investment over time has been helping the stock, year to date, despite the recent weak fundamentals. However, the setback came last Thursday, when the management announced a technology innovation, called "Final Level Cache." The management expects this innovation to be favorable for its long-term baseband prospects. "Our view is that the push around the new technology clarifies the management decision-making progress, and is the reason management has been expressing guarded optimism despite more flexible language on long term investment. Either FLC will drive incremental revenues, or wireless investment will come down," the Morgan Stanley report stated. Marvell Technology's enthusiasm regarding its "Final Level Cache" technology was the reason for the severe sell off on Friday, since it suggests that the wireless business is unlikely to be sold off in the near future. "But also, management is increasingly clear that an undifferentiated baseband product cannot be profitable; if FLC fails to make a difference, we expect the company to cut back investment," the analysts added.