- "While [Cavium] is seeing a slowdown in some of its markets in the near term, we expect topline momentum to be sustained for the next 2-3 years, and are forecasting earnings to yield a 28% [CAGR] over the next three years," writes CLSA's Srini Pajjuri, launching coverage with an Outperform rating and $85 target.
- Pajjuri: "We expect Cavium (CAVM +2.6%) to benefit from product cycles in its core markets and share gains in adjacent markets such as Ethernet switching and ARM servers where the company has no presence today. At 31x [2016] PE, valuation is not inexpensive, but we believe is justified given the 20% three-year estimated topline growth and 28% EPS growth."
- Looking at specific products, Pajjuri trumpets the ability of Cavium's mainstay Octeon network processors to both outperform standard CPUs and provide more programmability than custom ASICs, with the help of accelerator modules. "We expect Cavium to continue to gain share from general purpose processors and capture a higher portion of bill of materials (BoM) due to the growing need for intelligence."
- He's also a fan of the company's Fusion processors for larger small cell base stations, and the potential for its Xpliant Ethernet data center switching chips (begin shipping in 2016) to gain ground against market leader Broadcom.
- Shares are up 23% YTD. Needham upgraded 2 weeks ago, stating it was more positive on Xpliant and other newer products following Computex meetings.