Cavium Networks Needs To Rebuild Its Growth Stock Cred

When I last wrote about Cavium (NASDAQ:CAVM), I was enthusiastic about the product launch and growth potential of this small(ish) semiconductor company, but very conflicted about the valuation and expectations. Since then, the company has offered up underwhelming guidance, a slower-than-expected launch of key new products, and a large acquisition that offers questionable value and a definite risk in how Cavium is perceived and valued.

The shares are only down about 12% from the time of that last article, but that's due in part to a strong rally off June/July lows. At the worst, the shares were down about a third in the intervening period. Looking ahead, I still have a lot of mixed feelings about this stock. I do genuinely believe that there is strong revenue growth potential in Octeon, Thunder, XPliant, LiquidIO, and LiquidSecurity and that Cavium delivers very good products for enterprise data center and service provider customers with high-end needs.

While I expect less from Cavium than I did before, the expectations are still robust, with near-term revenue growth above 20% and healthy long-term FCF margins. My new fair value(s) in the $50s offers upside, and there could still be a "disappointment discount" in the share price, but Cavium definitely needs to get back onto a "beat and raise" path.

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Cavium Networks Needs To Rebuild Its Growth Stock Cred

Seeking Alpha: As Mellanox Scales Up, So Do The Challenges

As picks go, I can't really complain about how Mellanox (NASDAQ:MLNX) has been doing. Up about 45% from when I last wrote about the stock, Mellanox has been executing well on the Intel (NASDAQ:INTC) Grantley-driven high-performance computing cycle, but also doing well integrating itself deeper into markets like high-end storage and cloud/Web 2.0. Mellanox has also continued to broaden its horizons, improving the software capabilities of its Ethernet switch products, introducing additional interconnects, and pushing the frontier on its Infiniband interconnects.

Are there threats? Of course. While QLogic (NASDAQ:QLGC) and Avago's (NASDAQ:AVGO) Emulex may not be threats at the high end, Intel and Broadcom (NASDAQ:BRCM) most certainly are. I believe that Mellanox can continue to find success by pushing the outer limits of available performance, but that runs the risk of limiting the company to specialty/high-end applications. I continue to believe that Mellanox can deliver long-term annualized growth of around 10% and generate significant free cash flow growth, but that potential is not nearly so undervalued as it was about a year ago.

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As Mellanox Scales Up, So Do The Challenges

Seeking Alpha: Can Grantley Open The Gates For Mellanox's Growth?

It has been a pretty frustrating case of "hurry up and wait" at Mellanox (MLNX). While there is little doubt that Mellanox is the technology and market share leader in InfiniBand, the value of that leadership has come into question. Mellanox has seen growth improving in its storage and Web 2.0 markets, the high-performance computing market has been sitting on its hands ahead of a major new product cycle from Intel (INTC). If the Grantley cycle can do for Mellanox what the earlier Romley cycle did, Mellanox could finally live up to some of that growth potential, but a series of disappointments and more muted expectations for Grantley have made this more of a "show me" story.

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Can Grantley Open The Gates For Mellanox's Growth?

Investopedia: Can Brocade Get Any Benefit Of The Doubt?

Apart from using it as a tether ball in pieces talking about rumored M&A in the tech sector, there aren't many sell-side analysts who seem to have much use for Brocade (Nasdaq:BRCD). Certainly some of this skepticism has been earned by the company through years of sub-optimal execution, not to mention the fact that the company goes up against major rivals like Cisco (Nasdaq:CSCO). That said, even minimal growth expectations point to real value here and patient investors (with an especially high frustration threshold) may want to consider the stock.

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http://www.investopedia.com/stock-analysis/2012/Can-Brocade-Get-Any-Benefit-Of-The-Doubt-BRCD-CSCO-VMW-HPQ1120.aspx

Investopedia: Mellanox Hanging Out In The Right Places

Want to play Big Data? 


How about Web 2.0?

Oh, and what about Cloud?

You can get all that and more with Mellanox Technologies (Nasdaq:MLNX). This semiconductor company continues to log excellent growth with leading market share in high-performance interconnects. While the entry of Intel (Nasdaq:INTC) into its core market is clearly a threat, aggressive investors may yet do well with this name.

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http://stocks.investopedia.com/stock-analysis/2012/Mellanox-Hanging-Out-In-The-Right-Places-MLNX-INTC-BRCM-QLGC-EMC0312.aspx

Investopedia: Brocade Moves Two Steps Forward, One And A Half Back

Brocade (Nasdaq:BRCD) is not a turnaround situation from a financial standpoint, but the stock has not managed to break out above $10 (and hold it) in almost a decade. Investors once loved the stock, but worries about the company's ability to match yesterday's growth in storage networking and find an interesting path in Ethernet has capped their enthusiasm of late. Now, with fiscal second quarter earnings in hand, the picture is still murky as the company cannot seem to make progress in both businesses at the same time. 


Some Good, Some Not So Good in Fiscal Q2
Brocade made some progress in the second quarter, but not as much as investors might have hoped. Revenue rose 10% overall from last year, but was up less than 1% on a sequential basis. Growth was led by the SAN business, which grew 17% from last year, but contracted a bit on a sequential basis. Ethernet was up a bit sequentially, but basically flat on an annual basis.

While the SAN business was helped by good performance in backbones, switches and adapters, the Ethernet business was smacked by a big year-on-year decline in revenue from federal customers, as several deals got pushed out. That federal detail is curious, as the state of the public sector market really seems to be a company-by-company phenomenon; Cisco (Nasdaq:CSCO) is not doing well here either, but Aruba Networks (Nasdaq:ARUN) (not a competitor to Brocade) and Juniper (Nasdaq:JNPR) don't seem to be having the same sort of problems.



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http://stocks.investopedia.com/stock-analysis/2011/Brocade-Moves-Two-Steps-Forward-One-And-A-Half-Back-BRCD-CSCO-QLGC-JNPR-EMC0525.aspx

Mellanox - To InfiniBand And Beyond?

If InfiniBand is going to be a major architect in high-performance computing, it looks like Mellanox (Nasdaq:MLNX) will be a hard company to ignore. This developer of semiconductor-based connectivity products deepened its commitment to InfiniBand on Monday, announcing the acquisition of Voltaire (Nasdaq:VOLT) - a company that sells InfiniBand-based switches for servers used in high-performance environments. (Learn more about the tech industry in A Primer On Investing In The Tech Industry.)

The Terms of the Deal
Under the agreement, Mellanox will pay $8.75 a share in cash for Voltaire, for a total net deal value of $176 million. That deal implies a valuation of 1.6-times for Voltaire on an enterprise value-to-revenue basis. That valuation is a little light relative to Cisco (Nasdaq:CSCO) or QLogic (Nasdaq:QLGC), but Voltaire has never been profitable and is tiny in terms of its revenue base. QLogic is more than eight times larger in terms of revenue, and Ethernet rival Brocade (Nasdaq:BRCD) is 30-times larger. 

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http://stocks.investopedia.com/stock-analysis/2010/Mellanox--To-InfiniBand-And-Beyond-MLNX-VOLT-CSCO-QLGC-ORCL-HPQ-FFIV1201.aspx