"But again, truth be told, if you're looking for the guilty you need only look into a mirror. "- V, V for Vendetta (2005)
Anyone investing in a hot tech component play should pay very close attention to Mellanox (MLNX) as it has now officially become a perfect case study for the space. The first lesson here is that the street always gets these stocks completely wrong by building models and extrapolating price targets that are completely inconsistent with all empirical evidence regarding operating performance for companies like this. Consequently, the growth spurts in the space always lead to valuations that are way out of whack with long term potential, and completely disconnected from very serious short term demand volatility.
The second lesson is always be skeptical of a CEO who is out there talking ridiculousness about potential suitors when the stock has a $5 billion valuation who probably knows full well that nobody would pay more than half of that for his company. When Kerrisdale Capital came out with a bearish piece on MLNX it took Mr. Waldman no less than a few hours to start making comments about how the company has been approached by suitors, can grow faster than anyone they can merge into, will be a $1 billion a year revenue business, and won't see competition in infiniband for at least three years.
That was three months ago. Since then Mellanox has disappointed, cut guidance, and then pre-announced results that already reduced revenue guidance by nearly 20%. The stock is down $70 over that stretch, and is fast approaching where it was when the Romley upgrade cycle started.
Don't you think now is a good time to let us know who those suitors were and what the best offer was?
If I was in house counsel at MLNX I'd probably be taking this opportunity to circulate an internal memo about carefully screening public communication going forward. Insiders can't be dumping stock left and right while the CEO is talking about takeovers and the CFO is off at investment conferences telling analysts that base line revenue guidance is a 'gut feeling'.
And why the pre-announcement for a company with such limited visibility? Do you really want to warn and then come back 3 weeks later and give ho hum guidance? Based on market activity it would appear that the public were pretty much the last people to find out about this miss because option activity and short interest movement indicate this news was not a big secret. Not a shocker for this space, but I am guessing the shareholder lawsuits in this instance are going to attract some very blood thirsty lawyers.
Anyway, the conference call in a few weeks should be fun. If I am one of the screaming buy analysts who built a DCF with a $150 price target I'd grow a backbone and ask some pissed off questions so people listening realize that I value my reputation. And if I am MLNX management I would consider just yanking revenue guidance from here on out because it is becoming too much of a problem. Though I am sure the very next thing that management will announce will be a buyback. I have no doubt that this will be their next move as it is the standard move of these companies when this happens. But does that even matter at this point? Anyway, in the future when you come across a company like this just make sure before you invest that you remember...Mellanox.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.