Cavium is Getting Better, Are you Watching?
Harsh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
2011 wasn’t a kind year for Cavium (NASDAQ: CAVM), a maker of semiconductors for networking and communication equipments. But, I knew that Cavium was capable of turning around its fortunes and looked like a good prospect for the long-term. The stock has managed to bring about a smile to investors' faces so far, with a year-to-date return of around 9%, which is quite impressive when compared to the beating it took last year.
Getting back on its feet
Cavium has gathered impressive momentum in 2012. In its recently-reported quarter, the company trumped Street estimates and followed it up with a sunny guidance, a sign that better things are on the way for this chip-maker. Although it is operating in a weak spending environment, Cavium is slowly but surely finding its footing again through design wins and innovative technology.
Moreover, the company is also witnessing positive trends in its markets. The core enterprise and service provider markets have been gradually improving, as evidenced by a 5% sequential rise in revenue to $55.3 million. Booking activity was strong in the quarter and Cavium started ramping up production.
Cavium had endured a rough time last year as its biggest customer, Cisco (NASDAQ: CSCO), was engaged in a business restructuring and placed lower orders. But Cavium is now seeing better orders from Cisco, with the bellwether making 29% of the company’s top line in the quarter, 11% higher on a sequential basis.
Better days ahead
Too much dependence on Cisco is a risk, and Cavium had experienced some troubled times last year because of this. Moreover, Cisco had signaled towards an industry slowdown when it last released earnings, but it seems like Cavium isn’t much affected by that if we go by the guidance it has issued. Cavium expects revenue of $59.7 million to $61.4 million for the current quarter, ahead of the consensus estimate of $59.9 million at its mid-point. The bottom line forecast is even better, with a projection of 11-12 cents a share easily ahead of the consensus of 8 cents.
Also, Cavium isn’t just resting on its Cisco contract. Apart from recording some more design wins at Cisco, Cavium has also found success at winning contracts at Alcatel-Lucent, IBM, Huawei, Juniper, Samsung etc. Cavium’s impressive technology has given birth to a number of impressive products, such as the OCTEON II processors, which went into mass production recently. These processors enable better performance with cost and power efficiency, and can be used in various applications that include cloud computing, infrastructure equipment, and routers.
Moreover, Cavium is relentlessly moving forward with its innovation. It recently announced a new initiative known as Project Thunder, under which it will develop a new family of multi-core system on chip (SoC) processors that will be used for Cloud and Datacenter applications. For developing these chips, the company has licensed ARM Holdings’ (NASDAQ: ARMH) ARMv8 64-bit architecture. This particular architecture from ARM is expected to provide better performance at a lower power for the Cloud and Datacenter market. Apart from the architecture, ARM’s broad software ecosystem will be another advantage for Cavium since it will help it in attaining new customers who fall within the ARM ecosystem.
The bottom line
After a forgetful 2011, Cavium has done well this year and looks to keep up the performance going forward. It has impressive design wins and cutting-edge chips, which will help it win more share in a market which is growing fast as more datacenters are built with the advent of Cloud computing. With such positives in the bag, I believe the stock has the potential to do even better in the future, which is the reason why I am initiating an Outperform CAPS call on Cavium.
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