Why Cisco's Weakness Is No Big Deal for This Component Supplier
Chipmaker Cavium has had a forgettable 2013. The company's consistent financial performance has been overshadowed by negative industry news from the likes of F5 Networks earlier this year and, more recently, Cisco . As such, despite posting impressive increases in both top and bottom lines in the past year, the stock has underperformed the broader market.
Cavium shares had jumped more than 10% after it announced its third-quarter results at the end of October. But Cisco's disappointing outlook for the ongoing quarter brought Cavium down to the ground in November. The fact that Cisco accounted for 18% of Cavium's revenue in the previous quarter gained greater importance due to the fact that Cavium had another quarter of record design wins.
Why Cisco's sorry outlook is not a big deal
Cavium's revenue had increased almost 30% in the previous quarter from the prior-year period, which is quite impressive. Also, gross margin improved 570 basis points, quarter over quarter. In addition, it seems like investors also missed the point that Cavium's revenue from Cisco in the previous quarter had grown 10% sequentially, even though the networking behemoth's revenue came in below estimates in the previous quarter.
While Cisco's sorry outlook -- it expects revenue to decline 8%-10% in the ongoing quarter -- hurt Cavium, this might be a short-term event. Cavium is expecting growth in its enterprise, data center, and wireless infrastructure markets to continue, and this wouldn't have been possible without demand from Cisco.
Cisco CEO John Chambers blamed a sluggish economic environment and the U.S. government shutdown as the reasons behind the company's woes. Also, it looks like Cisco is facing tough times in the emerging markets in the wake of the recent surveillance allegations, according to Reuters, and it has been affected by political repercussions in China.
Gaining traction elsewhere
In spite of such adverse conditions faced by its biggest customer, Cavium still expects revenue to grow around 22%, year over year, in the current quarter. However, there might be minor aftershocks of Cisco's reduced guidance. Cavium management is expecting some seasonal softness in the wired infrastructure market "due to year-end inventory management at a few specific Cavium customers." But then, Cavium's overall guidance is strong, and the company might do even better in the future.
Cavium's products seem to be finding great traction. Its flagship OCTEON product line continued to land design wins across a wide range of applications, including both new and existing customers. Cavium's innovation has played an important role in its impressive growth so far and the trend looks set to continue. Cavium recently sampled its 28-nanometer chips at various customers for different applications, and the results were better than expected.
Cavium is in the process of deploying its products across various service providers in North America, Europe, and Asia. The company is engaged in "intensive lab trials at 2 large U.S. service providers," which might be an indication that it is probably slated to benefit from the 4G rollout in the U.S.
Opportunity in China
Cavium has also found a way to benefit from the 4G expansion in China by China Mobile . CEO Syed Ali said over the conference call that Cavium shipped its products for the China Mobile 4G rollout in the third quarter, and greater volumes are expected in the current quarter. China Mobile will launch its 4G service this month in Beijing, Guangzhou, and Chongqing.
China Mobile plans to build 207,000 base stations across 31 provinces going forward, which means that it still has a lot of ground to cover. As China Mobile rolls out its 4G service to more states, chip suppliers such as Cavium will eventually find more business coming their way. What's more, Cavium management is of the opinion that the company is in a good position to benefit from 3G deployments in developing countries.
Cavium has a lot going for it. It has been innovating and recording design wins, it has big clients spread across continents that have helped it record strong revenue growth. Cisco might have weighed on its stock price lately, but that doesn't seem too much of a concern, as Cavium has other growth areas.
Moreover, Cavium's outlook suggests that it doesn't expect Cisco's guidance to impact it much. In addition, analysts are also optimistic about Cavium's prospects as they expect its earnings to grow at an annual rate of 45% over the next five years.As such, investors looking for an underappreciated tech play should definitely take a look at Cavium.
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The article Why Cisco's Weakness Is No Big Deal for This Component Supplier originally appeared on Fool.com.Harsh Chauhan has no position in any stocks mentioned. The Motley Fool recommends Cisco Systems. The Motley Fool owns shares of China Mobile. 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.