Chipmaker Cavium Inc (NASDAQ:CAVM) was supposed to be one of my better picks for 2013, but I have to admit that I have been wrong so far. Shares have underperformed the NASDAQ Composite index by a wide margin so far, appreciating less than 15%, and as I write this, the stock is down around 5%.
The year had begun on a promising note, but dropped off after fears of a slowdown in infrastructure spending after F5 Networks’ terrible report in April. However, Cavium Inc (NASDAQ:CAVM) rescued its stock after a solid quarterly report in May, but it looks like the latest second-quarter report has failed to strike a chord with investors who are selling the stock as I write this.
So, what went wrong in the report? Revenue came in at $74.2 million, which was an impressive increase of 34% from the year-ago period and was marginally ahead of the consensus estimate. Similarly, non-GAAP net income jumped considerable to $12.6 million, or $0.23 per share, from $3.5 million, or $0.07 per share, last year. Earnings were on par with the consensus estimate, as well.
On outlook as well, Cavium Inc (NASDAQ:CAVM) didn’t disappoint, as it expects revenue between $77.5 million and $80 million, ahead of the $78.6 million consensus at the mid-point. The expected earnings of $0.26 to $0.27 per share are also ahead of the $0.26 consensus estimate at the higher end. A look at the gross margin makes me more confident that I wasn’t wrong about Cavium Inc (NASDAQ:CAVM)’s business doing well this year, as non-GAAP gross margin jumped to 65.8% in the quarter from 60.6% last year.
So, I still do not see any reason why investors should be dumping the stock given that it performed well in the quarter and the outlook issued is also decent. Hence, with the stock being beaten down right now, why not consider buying some of it? While the company might have underperformed the market so far, the business is doing well, and that’s what we should ideally look at, a good business.
No dearth of opportunity
My opinion on the company remains unchanged, as I believe a company that provides chips for networking and communication equipment and has some solid clients should do well on the back higher infrastructure spending going forward. Cloud computing is expected to be the fastest-growing category according to the Telecommunications Industry Association, and Cavium Inc (NASDAQ:CAVM) is in the right spot to benefit from this growth.
Cavium has witnessed solid progress in its enterprise and data center business, which is not surprising when considering that networking bellwether Cisco Systems, Inc. (NASDAQ:CSCO) is its major customer and accounted for 18% of revenue in the previous quarter. Going forward, Cavium expects growth in cloud infrastructure on the back of software-defined networking (SDN).
Cavium Inc (NASDAQ:CAVM) is counting on the need for more efficient and denser data center processors to drive performance, and the moves by its largest customer should also enable it to perform well. Cisco Systems, Inc. (NASDAQ:CSCO) is looking to grab a greater share of SDN technology, although through a new architecture strategy. Cisco Systems, Inc. (NASDAQ:CSCO)’s Application-Centric Infrastructure looks to integrate data center management and cloud computing, and the company believes that it is better than SDN.
Cisco Systems, Inc. (NASDAQ:CSCO) will start deploying this architecture later this year. In addition, the company projects data center traffic to grow at a CAGR of 33% till 2015, clocking an annual run rate of 4.8 zettabytes. So, given Cisco’s predominant position in cloud computing and the rapid growth rate that it expects, I believe that Cavium is positioned to do better as Cisco goes about its cloud strategy.
Apart from Cisco Systems, Inc. (NASDAQ:CSCO), Cavium had also landed contract wins at various other Tier 1 players earlier in the year, such as Nokia Siemens, Samsung, Alcatel-Lucent, and Huawei. These should bring diversification to the table, and it looks like the positive effects of these customer wins is already showing.