Cavium Downgraded At This Wall Street Firm: Why?

Recent industry checks have revealed that Cavium Inc CAVM faces higher-than-anticipated competitive, cost, and timing risks. Consequently, JMP decided to trim its estimates on the company, downgrading the stock to Market Underperform with a $50 price target.

What's New

JMP's investigations at the ARM Tech Con and SC15 trade shows confirmed that ARM-based server efforts are progressing slower than it was originally expected. In addition, the company now faces "more complex and intense competitive dynamics for both its new computing and conventional networking" than analysts believe is generally appreciated, and surging cost and execution risks that are already starting to be reflected in the business' financial results.

What's Important

According to Gauna, "Cavium articulates one of the strongest innovation visions in technology," and the firm thinks this has led to very high expectations on the Street, which is now envisioning very optimistic growth and profitability scenarios and valuing the stock accordingly.

"Given the late stage of the current economic expansion cycle, already precipitously decelerating sales trends for Cavium, and only slowing developing next-gen opportunities," the firm decided to trim its non-GAAP EPS estimates for fiscal 2015 and fiscal 2016 to $1.45 and $1.50, respectively, from $1.48 and $1.60. The experts also introduced a fiscal 2017 estimate of $1.85.

Downgrade Drivers

Some key issues driving JMP's downgrade include the SC15 and Tech Con checks showing little "ARM-based server progress beyond press releases and a modest broadening of ODM support." Also, that Intel Corporation INTC "is getting more aggressive across high/mid/low end systems, which narrows the gaps for Cavium to exploit, and that "Freescale/NXP appears to have adjusted from its architectural disadvantages and is now fielding," what the experts see as "more capable ARM-based approaches in networking."

The analysts also noted other elements weighing on the downgrade, including their view that the "Cavium ThunderX wins with Lenovo, including what we believe is an intriguing 2U opportunity, appear to still be in the trial phase and are not without other competition" and the fact that multiple industry players informed the experts that "when ARM-based server opportunities emerge in earnest in 2017/18 or later, they see the internal efforts from Cloud or OEM giants, or major programs from Hi Silicon or QUALCOMM, Inc. QCOM taking the lion's share of the opportunity."

While Cavium does have some alluring near-term opportunities, the stock seems to be discounting overly bullish growth and ThunderX estimates, "and the risk to the stock is compounded by the danger of market rotation away from more speculative (and decelerating) growth stories like Cavium."

Disclosure: Javier Hasse holds no positions in any of the securities mentioned above.