This Semiconductor Stock is Ready to go to the Next Level

Harsh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Being a component supplier for networking and communication equipment isn’t easy in these times. A shaky economic condition leads to lower technology spending, which affects the rate at which infrastructure is built and in-turn leads to tepid growth for both equipment makers and component suppliers.

Getting Better

However, there are a few companies which cannot be ignored, as they have cutting-edge technology and noteworthy clients, a potent combination which can help them succeed in the long run. Cavium (NASDAQ: CAVM) is one such company which you should take a look at. After a sadistic 2011, it has bounced back remarkably this year with a return of 20% so far.

Cavium’s top line has grown steadily this year, which is remarkable when we consider that technology spending has been muted. The company’s revenue jumped 10% sequentially in the recently-reported third quarter as it witnessed decent growth in its end-markets. Ramp up in 3G/4G infrastructure and growth in datacenters on the back of cloud computing are two major drivers that could propel Cavium’s stock higher in the coming years.

Solid Clients

And once you take a look at Cavium’s client list, the reason why I’m bullish about the company’s prospects will become very clear. Cisco (NASDAQ: CSCO), Huawei, Nokia Siemens and Ciena are some of Cavium’s illustrious customers. Cisco, which happens to be one of Cavium’s most lucrative accounts, is going all out to capitalize on the growth of cloud computing. It recently announced acquisitions of Meraki and Cloupia in order to bolster its position in cloud computing.

Hence, Cisco’s advances in cloud computing are a big plus for Cavium. In addition, Cavium expects to see improved demand in its enterprise and service provider markets. Service provider markets will be driven by growth in 3G and 4G wireless infrastructure while the enterprise segment is expected to be driven by growth in routers, application delivery controllers and security equipment.

Positives All Around

Maintaining a strong portfolio of customers is a difficult task but Cavium has pulled it off with aplomb so far by virtue of its superior technology. Its products such as OCTEON Fusion and NEURON have helped it garner design wins and capture share at major OEMs. For example, Cavium closed a number of design wins at important customers such as Cisco, Huawei and Alcatel-Lucent among others.    

Apart from the enterprise and service provider segments, Cavium is also witnessing steady improvement in its broadband and consumer businesses. The broadband business was under pressure previously, but Cavium seems to have bounced back in this area through important design wins in Taiwan and China at key customers.

In addition, Cavium’s innovative moves in the consumer business are remarkable. Cavium is looking to benefit from the growth in connected homes, and it recently announced that its chip is powering LG's wireless display adapter for the Optimus G and the Google (NASDAQ: GOOG) Nexus 4 smartphones. The Nexus 4 is in great demand and I would'nt be surprised to see if Cavium can ride its success through strong sales of the wireless adapter.

Cavium’s state-of-the-art wireless display solutions are finding good acceptance at major mobile makers, and they would be powering devices running Google’s latest Android 4.2 software. Considering the fact that a number of devices would run Google’s latest operating system next year and the Android operating system is the platform of choice for smartphone users, Cavium could gain a lot if consumers go for display adapters powered by its chips for viewing content on a larger screen.

The Takeaway

Cavium is well-positioned to benefit from the growth in mobile infrastructure and cloud computing. Its innovative and sophisticated technology helped it exit its previous quarter with record product bookings. More importantly, Cavium registered design wins across all its businesses, which tells us that it’s firing on all cylinders. Hence, it is not surprising that Cavium was ranked amongst the fastest growing companies in North America by Deloitte.

Thus, with a number of positives in the bag and a boatload of opportunities ahead, I believe Cavium has room to run higher. What do you think?

TechJunk13 has no positions in the stocks mentioned above. The Motley Fool owns shares of Google. Motley Fool newsletter services recommend Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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