Cavium Networks Powers Up

Investors clamored for allocations of yesterday's Cavium Networks (Nasdaq: CAVM  ) IPO. Even after the company boosted its price range from $10-$12 to $12-$13, shares rose another 22% to $16.45 on the first day of trading. It's a clear signal that investors see more growth ahead for the company.

Cavium develops chips that help improve how computer networks process voice, video and data traffic. With the surge of e-commerce, social networking, and online video, computer networks certainly need lots of help.

Cavium's more than 100 customers, including Cisco (Nasdaq: CSCO  ) , Nokia (NYSE: NOK  ) , and Juniper Networks (Nasdaq: JNPR  ) , can't seem to get enough of its products. Sales spiked 72% to $34.2 million in 2006.

Though the company lost $8.9 million on the bottom line last year, things are looking better. Cavium lost only $997,000 in the first quarter of 2007. R&D expenses are eating into Cavium's net income; they devoured $4.3 million, or 38% of revenue, in the first quarter. Nonetheless, the company's research efforts are helping it amass a considerable portfolio of intellectual property.

Cavium faces rivals such as Broadcom (Nasdaq: BRCM  ) , Freescale Semiconductor, Intel (Nasdaq: INTC  ) , and Marvell Technology (Nasdaq: MRVL  ) . Despite these competitors, the company offers a broad range of semiconductors that can operate at high speeds, maintain security, and reduce power consumption.

Assuming it posts revenue of $50 million for 2007, Cavium is now trading at a hefty 12 times forward revenue. Other hot tech IPOs such as DivX (Nasdaq: DIVX  ) and Sourcefire (Nasdaq: FIRE  ) have cooled off following their initial fervor, so Foolish investors may want to wait for the dust to settle before jumping in.

Further Foolishness:

Fool contributor Tom Taulli, author of The Complete M&A Handbook, does not own shares mentioned in this article. He is ranked 1,751 out of 28,345 in Motley Fool CAPS. Intel is a Motley Fool Inside Value pick. The Fool has a disclosure policy.


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