Mellanox Is in a Good Place

I am adding Mellanox Technologies Ltd. (Nasdaq:MLNX) to my portfolio tracked by "Globes". The Yokne'am-based company is a neighbor of EZchip Semiconductor Ltd. (Nasdaq: EZCH) and Marvell Technology Group's (Nasdaq: MRVL) Israeli unit. If investors in EZchip are adding a substantial premium on the basis of future success, in my opinion Mellanox is trading at a substantial discount on the basis of a very great slowdown, which may not arrive, and if it does, I don’t think will last for very long.

Mellanox has a market cap of $280 million, it is very profitable, and has $183 million in cash. I recently met its founder and CEO, Eyal Waldman, who previously founded Galileo Communications (acquired by Marvell (MRVL)), and I believe that Mellanox has a unique technological edge, a large target market, and appropriate products.

Mellanox develops InfiniBand chip-based solutions for rapid and efficient data communications between computer servers, especially at large data storage centers of giant corporations. The company sells its products via OEM agreements with large server manufacturers and storage systems developers, software developers in the sector, as well as through direct sales to end-users. Rumor has it that the company is jointly developing with Google Inc. (Nasdaq: GOOG) proprietary solutions for Google's gigantic data storage centers, which are based on computers that Google assembles itself.

Mellanox's target market is estimated at $2 billion a year. The company had $108 million in sales in 2008, which generated $31 million in cash from business operations, and $0.92 in earnings per share.

Mellanox had $25 million in fourth quarter 2008 sales, and its guidance calls for $22 million in sales for the first quarter of 2009. These two quarters reflect a drop compared with the preceding quarter, a direct consequence of the general slowing of investment in data systems.

Mellanox was able to maintain its high gross profit margin of 77.5% for the fourth quarter thanks to a higher rate of sales - 34% of total sales - of its fastest solutions, the G40. In the first quarter, the high gross profit margin will fall to 74% due to increased sales of solutions based on hardware, and not just processors.

When comparing the decline in Mellanox's activity because of the slowdown to that of other chip companies that have published warnings in recent weeks, such as Mellanox competitor Marvell, it can be concluded that Mellanox has not had a relatively dramatic drop, and no layoffs are expected.

I believe that Mellanox's cash, some of which will be used to acquire supplementary technologies, together with the company's proprietary technology, will enable it to resume rapid growth when the recession ends because the need to rapidly transmit and retrieve data will only grow with the data explosion we're experiencing.

While I add Mellanox to my portfolio, I am removing shares that are only memorials of the depression: Metalink Ltd. (Nasdaq: MTLK), Tower Semiconductor Ltd. (Nasdaq: TSEM), JDS Uniphase Corporation (Nasdaq: JDSU), and DivX Inc.(Nasdaq: DIVX).

Disclosure: Author holds Mellanox shares as part of his portfolio tracked by "Globes".

Published originally by Globes [online], Israel business news - www.globes.co.il

© Copyright of Globes Publisher Itonut (1983) Ltd. 2006. Republished on SeekingAlpha with full permission.

Comments

[Marcap:]

"I am adding Mellanox Technologies Ltd. (Nasdaq:MLNX) to my portfolio tracked by "Globes"."

That looks like an excellent move. Mellanox has a very solid balance sheet with virtually no debt to speak of, and a barrel full of cash. It's shares are also trading at only 25% over book, with over 20% of them held by insiders (a very good sign).

Good luck!

Feb 11 06:11 PM