This Stock Could Be a Winner in 2013, Don’t Miss it

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After a period of lull, spending on telecom infrastructure and data centers could be on its way up this year. Ever since telecom giant AT&T (NYSE: T) announced in November last year that it intends to spend $14 billion over the next three years for improving its wireless and wireline broadband networks, the positives around an upswing in telco spending aren’t stopping.

Ma Bell plans to extend LTE coverage to 300 million subscribers by the end of 2014, a move which could press other carriers into action as well. Also, Gartner predicts data center spending to improve 4.5% this year, while telecom capex is expected to improve 2.4%. Given the positive mood in the industry, it won’t be surprising to see a company like Cavium (NASDAQ: CAVM), which has both solid clients and products, turn in a solid performance this year.

Solid all the way

Cavium, which provides semiconductors for networking and communication equipment, has kicked off 2013 in style. It turned in an impressive performance in its just-reported fourth-quarter. Revenue jumped a remarkable 18% from the year-ago period to $66.4 million in the quarter, while non-GAAP earnings jumped almost 22% to $10.6 million, or $0.20 a share. In addition, Cavium also witnessed better gross margin and operating margin in the quarter from the prior-year period.  

Catalysts ahead

The Street is duly rewarding Cavium for its solid show as the stock has gained more than 5% post earnings. Investors know that Cavium is strategically positioned to benefit from improved IT spending this year given its portfolio of clients and design wins.

The company’s enterprise, data center and service provider businesses finished the previous fiscal year strongly. Roll out of 3G and 4G networks aided Cavium and it has recorded some impressive design wins to keep the momentum alive. The company made headway in key Tier 1 accounts such as Alcatel-Lucent, Cisco (NASDAQ: CSCO), and Huawei among others.

Cisco accounted for 17% of Cavium’s total revenue in the previous quarter. Although sales to Cisco declined on a sequential basis, it shouldn’t be ignored that the networking giant is aggressively looking to capitalize on the data center opportunity.

As fellow blogger Anindya Batabyal remarked, Cisco possesses industry leading switching and routing products for data centers, and is well-positioned to gain from data center build out. Cisco commands 12% of the Blade server market and has more than 11,000 customers for its data center products. Hence, Cisco is well-positioned to gain from further growth in data centers and this should benefit Cavium as well.

Diversification

But, Cavium isn’t just relying on Cisco for growth and diversified its clientele in the previous quarter. The company has a diversified pipeline as it landed design wins for both its enterprise and service provider business along with broadband and consumer. The broadband and consumer segment sells products for wireless display adapters and low end routers along with over-the-top video gateway.

Cavium’s wireless display adapters are finding great traction. Its PureVu product powers the wireless streaming adapter of Samsung’s Galaxy smartphones and Google’s Nexus 4 apart from Wi-Fi Alliance’s Miracast. The company has found takers in Asia for its broadband and consumer products, further diversifying its business.  

The takeaway

Cavium witnessed robust booking patterns in the previous quarter, and unsurprisingly, it expects the enterprise and service provider business to perform strongly. Its new products, such as OCTEON, which is an embedded multi-core processor for the enterprise, are expected to do well in the future. An impending jump in telecom and data center infrastructure spending indicates that Cavium could probably turn out to be a winner in 2013.


TechJunk13 has no position in any stocks mentioned. The Motley Fool recommends Cisco Systems. 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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