3 Positive Views on Cavium

Cavium Inc. (NASDAQ: CAVM) is one of the few tech stocks managing to do well after earnings. The stock fell almost 3% ahead of its earnings report, but it was last seen recapturing all of that and then some.

24/7 Wall St. has tracked three positive research reports on Cavium, which is a maker of semiconductor processors for intelligent and secure networks. If these analysts are right, investors could be looking at close to 40% upside, or even higher.

Canaccord Genuity’s Matthew Ramsay said that Cavium’s report was better than feared and is a relief for what has been bad for sector peers. He sees solid progress for all five new products to ramp in 2016. Ramsay’s report maintained a Buy rating but came with a cut in the target price, down to $74.00 from $76.00. His report said:

Despite two one-time product/sales transitions at key customers, softness in wireless infrastructure capital spending and tough macro that affected Cavium’s second half of 2015, results were solid versus guidance and gross margin continues to inflect higher as new products launch. While Q1/16 guidance was a hair below consensus, gross margin was ahead of expectation. Overall, given strong and in most cases earlier-than-expected progress on all five new product introductions for 2016, our long-term confidence in Cavium’s business remains strong and signs are positive that wireless spending in China is finally starting to rebound slightly entering the year. We reiterate our BUY rating and long-term conviction, but lower our estimates slightly given higher operating expenses near-term and this lowers our price target from $76 to $74.

Argus, a truly independent research firm without the traditional brokerage and underwriting potential conflicts, has a Buy rating on Cavium and even said that this company is one of its top ideas for 2016. The Argus summary said:

Rising operating costs support what should be Cavium’s busiest new-product-launch period ever in 2016. Major new products, including ThunderX, Liquid IO iteration 2, Octeon Fusion M (macro base-station on a chip), Xpliant switches, and Liquid Security, should ramp to volume and/or move into production in 1H16. We believe that Cavium is positioned for multiple years of above-peer-average revenue and profit growth as data center and cloud products ramp to volume and wireless recovers from recent weakness. Our two- and three-stage discounted free cash flow models generate an intrinsic value above $100, while our blended valuation model indicates a price of $82. Our 12-month target price is $76.

Oppenheimer analyst Rick Schafer reiterated his Outperform rating and has a $72 price target. The Oppenheimer thesis/summary said:

Multiple greenfield products have begun to ramp, though a hub transition at top five customer Amazon is curbing first quarter growth. As a result, management is guiding the first quarter up 1% to $102 million, just shy of consensus $103 million. Wireless capex, a material drag for Cavium and peers in 2015, has picked up. Gross Margin is poised to expand into 2017 as new, higher gross margin products ramp through the year. Cavium’s high profile ThunderX is tracking at/above expectations. We look for growth to re-accelerate in the second quarter through the end of the year. Our long-term growth and gross margin thesis appears intact and we remain buyers here.

Cavium shares were up 3.5% at $55.91 midday Thursday. That may be down from original high above $60 earlier in the morning, but it one of the better views in actual tech. This is also close to 52-week lows, as its 52-week range is $52.31 to $77.42. The consensus analyst target price for Cavium was $71.33.