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