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Cavium Blows a Fuse

Cavium Networks (Nasdaq: CAVM  ) , which builds chips for the red-hot broadband and video markets, went public in early May, as investors awoke to tech IPOs. Since then, the company's shares have spiked from $16.45 to $35.60. But on Wednesday, investors got a dose of reality, and the stock plunged 14%.

The fall followed gloomy remarks from two Wall Street firms. Lehman Brothers expressed concerns about high expectations, while Thomas Weisel expressed concerns about the firm's IPO lockup expiring, allowing insiders to cash out their shares.

Cavium's third-quarter revenue came in at $14.2 million, up 54% over the past year. Despite the hefty growth rate, Cavium has kept a lid on spending. The company posted GAAP net income of $1.3 million, or $0.03 per share, for Q3; that compares to a net loss of $100,000 -- breakeven on a per-share basis -- in the year-ago period. Cavium also enjoyed a big jump in gross margin during this time, from 57.8% to 63.2%.

The company's engineers keep building improved products to fend off competitors like Broadcom (Nasdaq: BRCM  ) , Freescale Semiconductor, Intel (Nasdaq: INTC  ) , and Marvell Technology (Nasdaq: MRVL  ) .

All the same, risks remain, including a highly concentrated customer base. Cisco (Nasdaq: CSCO  ) accounted for 24% of Cavium's revenue, while F5 Networks (Nasdaq: FFIV  ) took up another 18%. In fact, more than 50% of revenue came from only five customers. With so few customers providing so much of the company's sales, it's a good bet that Cavium's revenue will be lumpy on a quarter-by-quarter basis.

Another concern is the IPO lockup, which expires Nov. 5. In light of the surge in the stock price so far this year, it seems reasonable that insiders and other key investors will indulge in a fair amount of selling. In short, Foolish investors should expect to see continued volatility in Cavium's shares.

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DocumentId: 538853, ~/Articles/ArticleHandler.aspx, 10/24/2016 11:55:33 PM

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