A new report from the Semiconductor Industry Association (SIA) says that global chip sales rose some 10% to a record $28.1 billion in July from the previous year’s July. That bodes well for the shares of this semiconductor company.
Cavium (CAVM 54)
from Cabot Top Ten Trader
Cavium (CAVM) is a chip company that has a story right out of the 1990s—the company makes semiconductors that enable intelligent data processing at very high speeds, making them perfect for communications (routers, switches, 4G wireless infrastructure), storage, data center and even security applications. (Its biggest customer is Cisco, which makes up more than 15% of total revenue, and names like F5 Networks, Palo Alto Networks and Citrix are also customers.)
Cavium has been hitting the ball out of the park with its recent results, with great growth in nearly all of these areas, and management is bullish on the next few quarters thanks to some new design wins and product releases, particularly in its data center (the move toward cloud computing is helping) and core enterprise segments. Our only worry has nothing to do with the company itself, but the fact that it’s a “down the food chain” stock, as are most chip firms—if business softens a bit for Cisco, F5 or Palo Alto, orders could dry up in a hurry.
But the flip side of that is the markets Cavium is serving are booming now and are likely to grow handsomely for a long time; demand isn’t up for just temporary reasons. That’s why analysts see the bottom line rising more than 40% this year and nearly 30% in 2015. It’s not changing the world, but Cavium is in the right place, at the right time, with the right products.
CAVM has been a very choppy stock during the past few months, which makes it hard to handle—for instance, we had recommended it in the spring, but were knocked out of it as the stock dipped from mid-June to late-July. However, it’s come roaring back since then, moving to new price highs on earnings two weeks ago and consolidating since. The recent dip could go a bit further, but we think buying CAVM on dips and using a stop near the 50-day line makes for a good risk-reward trade.
Suggested Buy Range: 52-54;
Suggested Loss Limit: 49.5-50.5
Note: Cabot’s buy range is valid for two weeks.
Michael Cintolo, Cabot Top Ten Trader, 978-745-5532, September 8, 2014