1 Semiconductor Stock To Watch This New Year

In the closing week of the year, Cavium (Nasdaq: CAVM  ) came up with a saddening update, and scaled down its revenue guidance for the year-ending fourth quarter. This stock already made investors poorer by 30% last year, and the next earnings release may see it slide further. However, this is what makes things exciting and interesting, as I believe the company has enough arsenal to light up 2012.

Beginning with a thud …
The next earnings release will probably come as a dampener due to the subdued guidance, but then we are here to look for long-run returns. The semiconductor industry is undergoing inventory correction at the moment, which has led to softness in the market. However, this is not a new phenomenon in this industry, as in times of economic distress the demand for chips falls due to low sales of the end products in which they are used. This is a reason why Cavium's industry peers such as Texas Instruments and Xilinx have slashed their guidance for the ongoing quarter. However, there's some good news in store for the industry and for the company in the New Year.

… but getting better
Cavium hit a roadblock in the third quarter this year and saw a sequential drop of 5% in revenue as its businesses were hurt by a combination of weak demand and low sales to its key customer Cisco (Nasdaq: CSCO  ) , which is restructuring its business to make itself more competitive. But then, with the transition at Cisco complete and design wins worth around $600 million already in the bag, 2012 is certainly a year to look forward to for Cavium. Compare that to the $263 million of revenue generated by Cavium in the last twelve months, and you can see that the company has a major top-line growth driver in the bag. Also, more business is on the way for Cavium from Cisco, and some more ramp-ups are also in the offing from customers in Asia and Europe, which make the company's prospects brighter for next year.

The Foolish takeaway
2012 may begin unspectacularly for Cavium when it comes out with its earnings, but savvy investors may want to consider this one for the long term. To stay updated on Cavium's progress, click here to add it to your stock Watchlist and track its progress in the New Year.

Fool contributor Harsh Chauhan owns none of the stocks mentioned in the article. The Motley Fool owns shares of Cisco Systems and Texas Instruments. The Fool owns shares of and has created a bull call spread position on Cisco Systems. Motley Fool newsletter services have recommended buying shares of Cisco Systems. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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