Take Cavium’s Chips Off the Table

by Louis Navellier | June 14, 2012 7:00 am

In the past week, shares of chip maker Cavium (NASDAQ:CAVM[1]) have jumped 14% after the analyst community started issuing bullish projections for the semiconductor industry. Cavium in particular is a mid-sized company, but as a specialist in ARM-based chips it is making inroads with big players like Qualcomm (NASDAQ:QCOM[2]).

Does this company has the potential to be the next[3] Intel (NASDAQ:INTC[4])?  Let’s find out.

Company Overview

Based in San Jose, California Cavium designs, develops and markets chips that enable processing for a range of networking and communications applications. With a workforce of under 900, the company recently rolled out a number of 4G compatible semiconductor products designed for at home use as well as for businesses.

Earnings Buzz

Cavium released its first-quarter operating results at the beginning of May and the announcement left something to be desired. Compared with the prior quarter, the company’s loss widened by 47% to $13.8 million. Adjusted earnings dropped to 2 cents per share, but because analysts forecast earnings of just 1 cent per share, the company posted a 50% earnings surprise. Meanwhile, sales climbed 19% quarter-over-quarter to $23.6 million.

Industry Breakdown

There are currently 51 companies in the broad line semiconductor industry, the largest player being

ARM (NASDAQ:ARM[5]). Cavium falls right in the middle in terms of size, and falls in the upper quartile in terms of Price/Earnings to Growth ratio, earnings growth, sales growth, long-term growth rate and return on equity.

Cavium’s main competitors are Broadcom (NASDAQ:BRCM[6]) and Intel . Cavium is dwarfed by these largest competitors in size and operating margin but has a slightly higher gross margin than Broadcom[7].

Current Ratings

Before you buy any stock, you should always run it through my free Portfolio Grader[8] ratings system. The past 12 months have not been good to this company, to put it plainly. This time last year, the stock was a C-rated hold, but thanks to a series of abysmal earnings reports, each of the company’s eight fundamental metrics are now F-rated.

The only exception is cash flow, which still scrapes by with just a D rating. Meanwhile, buying pressure for this stock has hit rock bottom. This stock receives an F for its Fundamental Grade and an F for its Quantitative Grade.

Bottom Line

As of this posting, June 13, I consider CAVM a strong sell. The fact that Cavium ranks relatively high compared with other semiconductor companies just shows us how troubled the industry really is.

Recommendation: Strong Sell

Sound Off: What do you think about CAVM? Are you a buyer at current prices? Let me know what you think by posting on our wall on Facebook[9].

Source URL: https://investorplace.com/2012/06/take-caviums-chips-off-the-table-cavm-intc-armo-brcd-qcom/

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