This Cisco Systems, Inc. Supplier Is Sitting on a Huge Opportunity
Chipmaker Cavium's performance has been pretty disappointing over the last year. The stock has remained mostly flat while the Philadelphia Semiconductor Index has gained close to 25% in a one-year time frame. This tepid performance comes as a surprise since Cavium's top line and bottom line have grown at a brisk pace the last few quarters. However, once you consider that Cisco is one of Cavium's major customers, it becomes clear where the problem lies.
Cisco accounted for almost 20% of Cavium's revenue in the recently reported fourth quarter. Cisco is going through some difficult times, which seems to be overshadowing Cavium's solid growth. For instance, Cavium had taken a big hit in November after Cisco's poor outlook, despite posting outstanding results in the previous month.
And when Cavium posted its latest round of results late last month, the stock was punished once again as its revenue outlook was slightly below consensus estimates. Cavium management cited softness in wireline and telecom products due to seasonality, but Wall Street was unforgiving and Cavium shares dropped.
Not much of a concern
But, for the long run, Cavium looks to be a good prospect and its presence at Cisco should prove to be a big advantage. Cavium is steadily growing its clout at Cisco and revenue from the networking behemoth was up 36% year over year in the previous quarter, driven by a ramp up of new designs.
Even though Cisco has reduced its three-to-five-year growth outlook, this hasn't affected Cavium. Going forward, Cavium expects its Cisco account to grow further as it has been recording more design wins. Also, considering that Cavium makes processors for intelligent and secure networks, it could play a big role in Cisco's Internet of Things.
According to Cisco, the Internet of Things is a $19 trillion opportunity. There will be 50 billion connected objects by 2020 and this would result in a data boom, requiring more infrastructure and equipment. Now, Cisco is already in a partnership with various giants such as General Electric, Amazon.com, and Intel to propagate the Internet of Things, placing it in a solid position to benefit from this trend.
Cavium can expect to ride on Cisco's coattails in this market as it expects solid growth in enterprise data center products and wireless infrastructure. The company has been making good progress in an effort to capture as much of this market as possible. Its new 28-nanometer products are finding traction in enterprise, data center, and service provider segments.
Impressive product development
In 2013, Cavium's design wins were up more than 50% from last year for its core products. Also, the 28-nm chips already have 20 customers and Cavium has another 35 design wins in the bag.
Cavium's new products are targeted at network security, which the company believes will expand its addressable market considerably. Security, no doubt, is an important aspect of the Internet of Things as there might be numerous key objects such as door and car locks that would ask for your IP address in the future.
Until and unless there is absolute certainty that such sensitive objects are completely secure, they won't become a part of IoT. So, it isn't surprising to see why Cavium counts network security as a secular tailwind going forward.
Cavium hasn't set the Street on fire but the company's long-term prospects look quite good. It is also benefiting from China Mobile's TD-LTE roll out as CEO Syed Ali had remarked in the third quarter, while the deployment of 3G in developing countries could prove to be another tailwind. What's more, it is expected that Cavium's bottom line will grow at a CAGR of 32% over the next five years, underlining the huge potential that the company has.
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The article This Cisco Systems, Inc. Supplier Is Sitting on a Huge Opportunity originally appeared on Fool.com.Harsh Chauhan 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.
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