Pacific Crest Raises Cavium Estimates On QLogic Acquisition Close, But Concerns Remain

Pacific Crest has increased its 2017 estimates of

Cavium IncCAVM

following its completion of the QLogic acquisition. But, the brokerage expressed its concern over the deal, terming it as "reactive," despite acknowledging cost synergy opportunities from the acquisition.

Cavium completed the acquisition for $11.00 in cash, plus 0.098 shares of Cavium stock per share — or $16.07 per share — following which, Pacific Crest raised its 2017 revenue and EPS estimates to $957 million from $526 million and $2.60 from $1.87, respectively.

"We anticipate Cavium will be able to lower QLogic's manufacturing costs by 50% by bypassing ASIC providers and going direct to foundry. We believe this could drive significantly higher penetration in the Ethernet NIC market into converged NIC and on-board LAN segments, which represent a $1 billion or greater TAM," analyst John Vinh wrote in a note.

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However, Vinh said the motivation for acquisition of QLogic still leaves him wary.

"We believe the acquisition of QLogic was likely reactive in nature and believe the ramp of new-product revenue this year is likely tracking below prior expectations given a slower-than-expected ramp in ThunderX ARM servers," the analyst added.

That being said, Vinh noted that the ramp of Octeon Fusion M driven by service provider purchases is likely tracking better than expected.

Vinh maintains his Sector-Weight rating on Cavium shares and sees fair value in the range of $49–$52.

Shares of Cavium closed Wednesday's regular trading session at $51.96.

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