Chip Stock Cavium Eyes Growth In Data Center Market

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Officials at Cavium estimate the global market for data-center infrastructure at around $128 billion, which gives the company a nice fat target to focus on as it looks to grab a piece of the action.

Cavium ( CAVM ) designs systems-on-a-chip for the networking, telecom, storage, wireless, security and video markets. It is a "fabless" chipmaker, meaning it designs the computer chips but outsources the manufacturing to third parties.

The semiconductor company is probably best known for its core embedded chips and encrypting security processor chips. Its biggest customer isCisco Systems ( CSCO ), which accounted for 19% of sales last year.

Cavium has also scored design wins with numerous other leading lights of the tech world, includingIBM ( IBM ),Citrix Systems ( CTXS ),Qualcomm ( QCOM ),Netgear (NTGR) andJuniper Networks (JNPR).

Now Cavium is eyeing a bigger share of the market for data-center infrastructure, which includes servers, storage, networking, security and virtualization equipment.

Dining On Alphabet Soup

Increased spending on this kind of gear has been driven by an alphabet soup of 21st-century tech trends, including Software as a Service (SaaS), Platform as a Service (PaaS) and Infrastructure as a Service (IaaS).

To better harness these technologies, and stay current with the general shift to cloud-based and next-generation data centers, customers need a higher grade of system-on-a-chip solutions.

Cavium figures it has the answer with its new line of ThunderX server processors, which are designed for computers operating as cloud-based servers and data-center appliances.

On June 3, the firm introduced the ThunderX processors, which are based on 64-bit processing technology fromARM Holdings (ARMH).

ThunderX is the fifth generation of multicore processors from Cavium targeting high-performance volume servers and appliances for large data centers and cloud infrastructure, the company said in a press release. Cavium did not respond to requests for comment.

In a report, Canaccord Genuity analyst Matthew Ramsay said Cavium's portfolio of embedded and security processor products is "sufficient to sustain strong recent top-line growth."

But the ThunderX lineup adds a new dimension to the company's growth prospects, Ramsay said, because it "both expands Cavium's total addressable market and positions the company for strong long-term growth."

Wall Street seemed happy enough with the ThunderX announcement. Cavium's stock price rose 6% over a two-session period following the announcement. Shares continued to push higher over the next couple of weeks -- hitting a record high of 53.31 on June 16. However, Cavium shares have since fallen and currently trade near 45. Other stocks in the fabless semiconductor group have also retreated in recent days.

JPMorgan analyst Harlan Sur reckons ThunderX could add $200 million to $400 million in incremental revenue over the next three to five years for Cavium.

"Although a meaningful revenue contribution is expected in the second half of 2015, we believe the company could start to generate initial revenues as early as the first half of 2015, as several of Cavium's lead customers have already started to develop applications around ThunderX," Har said.

Thunder Road

ThunderX's potential should help Cavium maintain its recent momentum in terms of revenue and earnings growth, analysts say.

The company has delivered five straight quarters of double-digit sales gains. That streak ended a run of four straight quarters of declines amid a slump in the chip market.

Cavium has also produced six straight quarters of double-digit or better EPS growth.

"Revenue drivers for 2014 include demand from wireless infrastructure, cloud data center and security markets," said Imperial Capital analyst Ashok Kumar, who initiated coverage on Cavium three weeks ago.

During the first quarter, Cavium posted earnings of 30 cents a share, up from 19 cents the prior year and 2 cents above consensus estimates. Revenue rose 20% to $83.2 million, also topping views.

Cavium is due to report Q2 results on Wednesday. Analysts polled by Thomson Reuters expect EPS of 33 cents, up 43% from a year earlier. Revenue is seen rising 21% to $90 million.

Full-year earnings are expected to climb 39% in 2014 and an additional 28% in 2015.

"Over the next few years, we continue to see a runway of double-digit top- and bottom-line growth as the company fires on several new product-cycle ramps," Har said.

In The Chips

Cavium's recent growth is partly attributable to a rebound in the global chip market.

Earlier this month, the Semiconductor Industry Association said worldwide sales of semiconductors reached $26.86 billion in May, the most recent month data are available. That was up 8.8% from the previous year and 2% from the previous month.

The global semiconductor market posted "healthy" growth throughout all geographic regions in May, led by continued strength in the Americas, said Brian Toohey, president and CEO of the Semiconductor Industry Association.

"Overall, the global market has posted growth each month for over a year, and sales are expected to increase for the foreseeable future," Toohey said.

That bodes well for Cavium, which does a pretty good job of spreading its business around.

In 2013, about 30% of its revenue came from the U.S. China ranked second at 26% of the total, followed by Korea (10%), Taiwan (9%), Mexico (7%), Finland (6%) and Malaysia (5%). The remaining 7% was scattered among other countries.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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