Any investor who wants to take a value approach toward tech stocks had best have some patience. While some quality stocks do give investors a chance to pick up shares at a reasonable chance, others only get affordable once the growth opportunities have largely gone away.
Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers.

It seems unlikely that Cavium's (Nasdaq:CAVM) growth potential has left the building. Instead, this semiconductor company has seen the shares sell off sharply on a broad-based slowdown in its core enterprise and service provider markets. With relatively few technology peers and sizable addressable markets, this could simply be a lull in a long-term growth story.

A Tough Quarter, as the Company Warned
When the company reported its earnings in early May, the results largely matched the warning that the company had released beforehand. Revenue fell 17% from the prior year's level and about 6% on a sequential basis, with the broadband and consumer business posting a double-digit sequential decline. With that decline in revenue, the company saw margin compression and saw operating profits flip over to operating losses.

2012 Should Get Better as the Year Rolls on
There was an unfortunate trend with tech stocks in this first quarter - the companies that reported "on cycle" had fairly solid guidance, while those that reported later tended to alarm and disappoint the Street. The risk, then, is that the tech and IT market has gotten significantly weaker in the last month or so.

Cavium followed this pattern, but with a somewhat more optimistic twist. Guidance for the second quarter was soft, but management seemed to be more confident that business was going to pick up as the year went on.

SEE: Can Earnings Guidance Accurately Predict The Future?

Certainly there are some reasons for optimism. The company has meaningful new product launches and ramps with major tech hardware vendors like Cisco (Nasdaq:CSCO), F5 (Nasdaq:FFIV) and Citrix (Nasdaq:CTXS). Likewise, while the consumer and broadband opportunities for Cavium are still dwarfed by its enterprise business, their upcoming launches in broadband gateways and mobile devices worth watching.

A Story that Sounds Good Long-Term
The Cavium story revolves around the company pushing its more advanced chips further into enterprise and carrier products. These multicore chips can handle complex tasks and allow customers like Cisco, Juniper (Nasdaq:JNPR), and F5 to basically do more with fewer chips - a migration that has been quite popular in wireless devices as well.

Cavium still has a sizable lead on Freescale (NYSE:FSL), and Broadcom (Nasdaq:BRCM) has a lot of work to do with NetLogic. At the same time, Cavium is targeting new multi-hundred million dollar addressable markets and is looking to take on other companies like Altera (Nasdaq:ALTR) and Xilinx (Nasdaq:XLNX) in select applications.

SEE: A Primer On Investing In The Tech Industry

The Bottom Line
To the extent that investors still believe that Cavium's potential growth can be measured in the high teens to low 20's, these shares may finally be cheap enough to buy. Very few people seem to believe that Big Data or enterprise IT spending is over, and the capabilities of Cavium's chips should make them significant fixtures in enterprise-critical hardware.

Against that fundamental picture is the reality that summer is often a bad season for tech stocks, and Cavium is not looking for any particular rebound in the second fiscal quarter. While investors have to accept the risk that they cannot call the bottom on this stock, the long-term value would suggest that these shares are worth a look.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Investing

    The Rise of Corporate Venture Capital

    After the success of Google Ventures, corporate venture capital is an increasingly popular diversification and hedging tool for many large corporations.
  2. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  3. Investing

    What’s Plaguing Twitter and Yelp?

    Yelp and Twitter have recently become grounded in reality and unable to justify their sky-high stock valuations.
  4. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  5. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  6. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  7. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  8. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  9. Professionals

    What to do During a Market Correction

    The market has corrected...now what? Here's what you should consider rather than panicking.
  10. Mutual Funds & ETFs

    ETF Analysis: Vanguard Mid-Cap Value

    Take an in-depth look at the Vanguard Mid-Cap Value ETF, one of the largest and most popular mid-cap funds in the U.S. equity space.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  3. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  4. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  5. Ltd. (Limited)

    An abbreviation of "limited," Ltd. is a suffix that ...
  6. BHD (Berhad)

    The suffix Bhd. is an abbreviation of a Malay word "berhad," ...
RELATED FAQS
  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  4. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  5. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
  6. What happens to the shares of stock purchased in a tender offer?

    The shares of stock purchased in a tender offer become the property of the purchaser. From that point forward, the purchaser, ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!