Why are Investors Buying This Semiconductor Stock?

It appears Cavium Networks (NASDAQ:CAVM) was completely off the map for hot money, as the company reported a quarter with very nice metrics but not much off what analysts expected.  For whatever the reason (perhaps the announcement of a purchase of a Chinese company) the stock is exploding higher this morning… after actually trading down in after hours yesterday.  Which yet again shows how arbitrary reactions to earning reports are – even the same report can create a reaction 180 degrees different 15 hours apart.

Analysts were in for $59.1M in revenue and 27 cents EPS; Cavium had a slight beat on the top line at $59.8M and bested estimates by 2 cents on the bottom – not normally something I’d associate with a 12-13% surge the next day in a normal market.  Gross profits were pretty flat at 65.2%.

  • Net income for the fourth quarter of 2010, on a non-GAAP basis, was $14.9 million, or $0.29 per diluted share, compared with non-GAAP net income of $12.5 million, or $0.25 per share in the third quarter of 2010.
  • Revenue in the fourth quarter of 2010 was $59.8 million, an 8% sequential increase from the $55.2 million reported for the third quarter of 2010 and an increase of 86% from the $32.1 million reported for the fourth quarter of last year.

I have to assume the stock is surging due to this very small acquisition:

  • Cavium Networks (NASDAQ:CAVM), a leading provider of semiconductor products that enable intelligent processing for networking, communications and the digital home, announced today that it is has signed a definitive agreement to acquire China-based privately held Celestial Semiconductor, a fabless semiconductor company headquartered in Beijing, China with centers in Shenzhen and Shanghai. Celestial is a fast growing provider of ARM-based system-on-a-chip (SoC) processor solutions for a range of digital media applications.
  • The net purchase price of the acquisition will be approximately $55 million, to be paid in a combination of cash and stock.   Cavium Networks expects this acquisition will be non-GAAP earnings neutral during the first half of 2011 and modestly accretive by the second half of 2011.

One analyst weighs in

  • “The new acquisition will grow their presence in television along with wireless high-definition multimedia interface (HDMI) products,” Stifel Nicolaus analyst Kevin Cassidy told Reuters.  “It could open up new markets for them. They don’t have a lot of market share in TVs in general.”

Cavium Networks is a leading provider of highly integrated semiconductor products that enable intelligent processing in networking, communications, storage, wireless and video applications. Cavium Networks offers a broad portfolio of integrated, software compatible processors ranging in performance from 10 Mbps to 40 Gbps that enable secure, intelligent functionality in enterprise, data-center, broadband/consumer and access & service provider equipment.

Disclosure: No positions

This is a guest post written by Trader Mark who runs the blog Fund My Mutual Fund.

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