This Cisco Supplier's Outstanding Run Isn't Over Yet

As chipmaker Cavium's fortunes are closely tied to Cisco , the stock was in the doldrums earlier this year. Cisco finished 2013 on a weak note as it slashed its three-to-five-year growth forecast. Naturally, Cavium shares took a solid beating, as the networking giant accounts for approximately 20% of its revenue.

However, Cavium's business was strong and it reported solid growth, so Cisco's troubles weren't affecting it at all. As such, it was only a matter of time before Cavium came out of its slump, and it has done the same in a handsome manner this year. The stock is up nearly 50% so far, trading quite close to its 52-week high.

Even now, there's a strong probability that Cavium will continue gaining even after its solid run this year. The company is primed to benefit from key trends in the tech industry that could help it sustain solid momentum. But, looking at Cavium's robust performance in the first quarter will show how well the company has really been doing.

Impressive results
Driven by demand for its wireless chips, Cavium's revenue was up 20% from the year-ago period. Also, the company turned profitable, reporting a net income of $2.3 million, compared to a loss of $3.2 million in the year-ago quarter.

Excluding one-time adjustments, earnings rose 58% from the year-ago quarter to $0.30 per share, surpassing consensus estimates of $0.28. Cavium also issued a sunny forecast for the ongoing quarter, which doesn't come as a surprise since the company is riding some key catalysts.

Enterprise and data to drive growth
Cavium is seeing strong demand for products used in the data center and security appliance markets. The company's 28-nanometer chips such as OCTEON III, LiquidIO, OCTEON Fusion, and NEURON are scoring design wins in the enterprise, data center, and wired and wireless infrastructure markets. 

The security segment is turning out to be a key growth driver, with Cavium's NITROX, OCTEON, and FIPS products witnessing good adoption rates. The company is targeting next-generation firewalls, unified tech management appliances, cloud security, and secure HTTPS Web servers with its security products. 

This is a smart move, as the need for security is paramount in today's connected world. Focus on security should enable Cavium to land more design wins at Cisco, which is trying hard to make the Internet of Things secure. In March, Cisco launched the "Internet of Things Grand Security Challenge," inviting programmers to attempt to patch security flaws in connected appliances, devices, and vehicles. With this challenge, Cisco focused on the software side of the Internet of Things, but for the hardware side, a chipmaker like Cavium would certainly come in handy.

In fact, Cavium has already started shipping prototype products for Internet of Things applications, distributing sample units to more than 50 customers across the globe. 

Apart from the security aspect, Cavium's processors are also poised to benefit from the expected growth in data usage. According to Cisco, the Internet of Things will result in 50 billion connected devices by 2020, opening up a $19 trillion opportunity. Such a huge number of connected devices will require more equipment, which will ultimately result in more demand for Cavium's chips.

Cavium's solutions, such as the 2.5 gigahertz 48-core OCTEON III processor, are equipped with the highest computing power, compared to any other standards-based communication processor chip. With such products in its arsenal, the company is well-positioned to profit from data growth.

Final words
Cavium is a key supplier to Cisco, the driving force behind the Internet of Things. On the back of its solid product development moves, Cavium can land more design wins for Internet of Things applications.

The company is already reporting impressive revenue and earnings growth, and there's a good chance that its performance could improve. As such, investors shouldn't be concerned with the fact that Cavium trades at its 52-week high, as the company is quite capable of breaking that barrier and soaring to new highs.

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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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