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Marvell Technology's Shellacking Continues

The chipmaker's bad news double whammy sends shares to a new 52-week low.

Investors continued to punish

Marvell Technology Group's

(MRVL) - Get Marvell Technology, Inc. Report

stock early Tuesday, a day after the company shocked the Street with a double dose of bad news.

Marvell shares sank 14% in midday trading, setting a new 52-week low, in the wake of the chipmaker's news that third-quarter revenue will be less than expected and that the company will restate financial results because of discrepancies in past stock-option grants.

Shares of Marvell closed Monday's regular trading session down 1.4%, or 28 cents, at $19.09.

The Santa Clara, Calif., company said sales in the current quarter will drop about 10% from the $574 million in second-quarter revenue.

Analysts polled by Thomson First Call were looking for revenue to increase about 1.4% sequentially, to $582.3 million. EPS is projected to be 21 cents.

Marvell attributed the shortfall to slumping demand among its hard-disk drive customers. The chipmaker said the soft demand stems from weaker-than-normal seasonal shipments in the PC market, as well as excess inventory held by some of its significant storage customers.

Hard-drive maker

Western Digital

(WDC) - Get Western Digital Corporation Report

slipped 2% in sympathy to $17.38 in early trading.

"We view this decline in our revenues as a short-term event, and we remain focused on continuing to aggressively invest in our business and to expand the reach of our technology into a growing number of high-volume markets," said Marvell CEO Sehat Sutardja.

Wall Street analysts pointed to the recent merger between hard-drive makers

Seagate Technology

TheStreet Recommends

(STX) - Get Seagate Technology Holdings PLC Report

and

Maxtor

as playing a key role in Marvell's problems.

Marvell's business as a supplier of chips for Maxtor's 160-GB hard drive, for instance, appears to have been a victim of the merger, as Seagate ceased accepting new shipments of components for the Maxtor drive after July, according to Needham analyst Charlie Glavin.

"Further, we believe MRVL was aggressively shipping into the channel exiting F2Q and had to trim numbers when orders did not pan out," Glavin wrote in a note to investors.

But Marvell's issues appear to be company-specific, rather than an indication of a broader market trend. Marvell's comments "are incongruent with recently released SIA (Semiconductor Industry Association) data and continuing data points out of Asia, indicating that PC unit shipments are returning to more seasonal trends," wrote Glavin, who has a hold rating on Marvell shares, and whose firm makes a market in Marvell shares.

On Monday, the SIA released

its report on August chip sales , which pointed to strength in DRAM memory-chip shipments as evidence of continuing strength in demand for PCs.

Even Marvell bulls acknowledged that the magnitude of the revenue miss blindsided investors.

But CIBC World Markets analyst Allan Mishan, who rates Marvell a sector outperformer, interpreted the preannouncement as a "game-changing" event for Marvell.

"With storage share gains now in the past, Marvell's growth must now come from new areas," Mishan wrote in a note to investors. He said that recent internal investments in wide-area network and voice-over IP chips, as well as acquisitions such as Marvell's $600 million purchase of

Intel's

(INTC) - Get Intel Corporation Report

cell-phone processors, offer numerous opportunities for future growth.

"Though our estimates and PT are coming down, we remain bullish longer term as these investments turn into renewed profitability growth," wrote Mishan, whose company makes a market in Marvell shares.

The warning marks the second consecutive revenue shortfall for a company that has wowed investors with solid growth over the past several years. In August, Marvell posted

second-quarter sales that came in below expectations.

And the $580 million third-quarter revenue guidance that Marvell served up at the time was significantly below analysts' third-quarter projections of $622.5 million.

The company did not report profit figures at the time because of its ongoing internal review of its historical stock-option practices. Marvell is among more than 100 companies under scrutiny for a widening controversy involving the backdating of stock options.

Marvell said it expects a significant increase in general and administrative expenses in its third quarter due to higher-than-expected costs incurred from the ongoing stock-option review.

In a separate release after the bell Monday, Marvell said that the special committee of its board of directors looking into past stock-option practices has reached a preliminary conclusion that the actual measurement dates of certain past stock-option grants likely differ from the recorded grant dates for such awards.

As a result, Marvell's board has concluded that the company will need to restate previous financial statements to record additional noncash charges for stock-based compensation expenses.

Marvell said it has not yet determined the amount of these charges or which specific reporting periods they affect. But the company said that investors should no longer rely on any financial statements issued since the company went public in 2000.

The chipmaker said it intends to file its restated financial statements as soon as possible after the completion of the stock-option review.