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Cavium Network (NASDAQ:CAVM) shares took a hit Friday after Needham’s N. Quinn Bolton cut his rating on the stock to Hold from Buy.

Cavium, which provides chips used in networking hardware, has been a red-hot IPO: the company came public May 1 at $13.50, and has since marched steadily higher. Bolton says fundamentals remain solid, but he thinks the stock is now fairly valued.

Bolton notes that the lock-up agreement for the company’s IPO expires on October 28, freeing up 31.8 million shares held by insiders. Average trading volume in the stock has been just under 250,000 shares, he notes. The obvious implication is the market could be flooded with CAVM shares, which would drive down the stock price.

Bolton also contends that there is “limited upside” to current estimates for the third quarter of $14 million in revenue and EPS of 4 cents a share, since “Cavium’s story remains more of a design win story at this point.”

What Bolton never quite comes out and says it, the underlying message here is that the valuation has gotten rather out of hand. Cavium has a market cap of about $1.3 billion. Bolton sees the company reporting 2008 revenue of $87.5 million and EPS of 47 cents. The stock closed Thursday night at $33.88. Ergo, the stock is trading at 17x next year’s revenues, and 72x next year’s EPS. Air is getting a little thin up here, dontcha think?

CAVM 3-mo chart:

Source: Needham Thinks Cavium's Valuation Has Gotten Out Of Hand