China Coming Good For EZchip

by: Shlomi Cohen

Just when a correction is called for, after double-digit returns so far this year for the Dow Jones and Russell 2000 indices - 10.8% and 12.1% respectively - out of the blue at the start of the trading week, the "Cyprus trigger" comes to do the job. The million dollar question is how deep the correction will be, and how quickly the huge money sitting on the fence or in government bonds, will enter the market fearing that it will miss out on the correction, as happened in the final week of February.

A short correction could set off the next stage in the U.S. rally, because the macro data from there, particularly on employment and real estate, indicate recovery. On the micro level, the next test will be the reporting season that will begin in about a month's time, and before that, the number of profit warnings from leading companies.

In technology, Apple (NASDAQ:AAPL) rose in the past two sessions, at the same time as the launch of the Galaxy 4 from Samsung (OTC:SSNLF), which itself fell in those two sessions. The opposite and unexpected movements of the two smartphone giants, just at the time of a big launch, tells me that the capital market does not see the new Galaxy as a substantial threat to Apple, which is expected to raise its dividend very shortly, and perhaps even raise its budget for buying back its own shares.

The next trigger for Apple shares will be the results and guidance in a month or so, and expectations are currently rock bottom. Later, between the spring and fall, Apple will, as usual, speak through new launches.

In the next few days, several Israeli companies will present at the big annual conference for small growth companies held in California by investment bank Roth Capital. Among the stocks that I hold in my portfolio here, EZchip Semiconductor Ltd. (Nasdaq: EZCH), ClickSoftware Technologies Ltd. (Nasdaq: CKSW), Nova Measuring Instruments Ltd. (Nasdaq:NVMI) and Attunity Inc. (NASDAQ:ATTU) will make appearances. In addition, it will be interesting to hear the managers of RRsat Global Communications Network Ltd. (Nasdaq:RRST), Sapiens International NV (Nasdaq: SPNS) and Perion Networks Inc. (Nasdaq:PERI), three companies in special and interesting niches, that have been enjoying positive business momentum after changes in their CEOs in recent years. All three have recently hit peaks of more than two years.

Among the Israeli companies at the conference, the one with the largest market cap of all the companies there, EZchip, will arouse especially high interest. It will be represented by founder and CEO Eli Fruchter. The company's share price plummeted after its last results, because of a reduction in its forecasts for the coming years, against a background of uncertainty about Chinese customer Huawei. Since then, several interesting things have happened in its market. The world's largest telephony company in terms of number of subscribers (710 million), China Mobile (NYSE:CHL), caused astonishment last week, when it reported that it raised its investment budget for the coming year by 50%.

This increase will lead to a dramatic rise in sales by the two Chinese players in network infrastructure, ZTE and Huawei, the first a customer of EZchip, and the second "a customer on the fence." I have no doubt that if Huawei supplies high performance routers to China Mobile, it will again start buying EZchip's fourth generation processors.

Altogether, the rise in investment in China joins the expected rise in the U.S. and other places, because of the roll-out and expansion of LTE networks. Therefore, this year, EZchip will enjoy growth in orders from its largest customer, Cisco (NASDAQ:CSCO). But it will also enjoy the momentum that has begun only this year in the introduction of new routers from Ericsson (NASDAQ:ERIC), based on fourth generation EZchip processors, especially to the U.S. mobile market, but also to Europe, despite the recession there.

Finally, this week, two technology companies will release results that will have consequences for companies I hold here. On Wednesday, after the close, Oracle (NASDAQ:ORCL) will report, and Mellanox Technologies Ltd. (Nasdaq:MLNX) investors will want to hear about a continuing strong rate of sales of its Exa platforms for cloud computing and Big Data, based on Mellanox's InfiniBand technology.

In memory chips, Micron (NASDAQ:MU) will report after the close on Thursday. Micron operates in every sector in this field, but what it will have to say about the NAND sector will have an immediate effect on SanDisk Corporation (Nasdaq:SNDK), which deals only in this niche. In recent weeks, prices of both NAND and DRAM memory have risen dramatically, and so the two stocks shot up and broke through peaks of more than a year's standing.

Barron's says that, apart from SanDisk - which is only in the hot markets of smartphones, tablet computers, and SSD drives - the rise among the other memory chip and hard disk players is not justified and will not last far into the year, because of a continuing slowdown in the computers market.

Published by Globes [online], Israel business news - - on March 18, 2013 © Copyright of Globes Publisher Itonut (1983) Ltd. 2013 Reprinted on Seeking Alpha with permission

About this article:

Problem with this article? Please tell us. Disagree with this article? .