EZchip's Win(tegra)-Win Situation; Now'sa Good Time to Buy Camtek

 |  Includes: CAMT, MLNX, MRVL
by: Shlomi Cohen

As I estimated last week, Cisco (NASDAQ:CSCO) has become a major customer of EZchip Semiconductor Ltd. (Nasdaq: EZCH; TASE:EZCH), through Marvell Technology Group (Nasdaq: MRVL), and in the first quarter contributed 11% of sales. It is actually much more, as EZchip gets royalties from Marvell - that is, just the bottom line. Revenue is recorded with Marvell.

The strong growth trend of Cisco as a customer will continue in the second quarter as well, because the guidance for a high gross profit margin of around 75% is an indirect way for EZchip's management to tell the market that there will be growth in royalties from Marvell.

EZchip shares sold off sharply on Thursday, because the entire market fell, but also because as a momentum stock with a very high sales multiple, investors wanted to see a higher level of revenue in the quarter than $13.6 million, which is only 6% above the corresponding quarter of 2009. I believe that EZchip management is aware of the problem of the high sales multiple, and so in recent months it tried to buy Wintegra. Wintegra would have instantly brought it entry into the access processing semiconductor market, a market in which EZchip itself will only have a significant weight next year, with its own chips.

Wintegra turned down EZchip's proposal, because it preferred an IPO at a valuation of $300 million and more - a price tag that EZchip cannot allow itself.

Wintegra's numbers, revealed in its prospectus published on Friday, show that if it were now a part of EZchip, then EZchip's first quarter sales would have been almost double, at around $25 million. In addition, Alcatel-Lucent (ALU) would be a significant customer - the only customer among major router developers today that does not use an EZchip network processor, but prefers internal development.

Only if the market collapses, and again, like four years ago, Wintegra fails to go public, will it fall like a ripe fruit to EZchip, which has $75 million in cash, and a share price which despite a fall, reflects a market cap of $400 million. On the other hand, if the IPO succeeds, and Wintegra's valuation will be above $300 million, no investor will consider EZchip expensive.

A good entry point for Camtek

Later this week Camtek Ltd. (Nasdaq: CAMT; TASE:CAMT), which I hold in my portfolio tracked by "Globes", will publish results. I expect that like Orbotech Ltd. (Nasdaq: ORBK), Camtek has also enjoyed a strong market in printed circuit board inspection; and like Nova Measuring Instruments Ltd. (Nasdaq:NVMI; TASE:NVMI), I assume that Camtek's chip solutions saw high demand.

In the first quarter, Camtek apparently sold around $18 million, in the upper range of its guidance, and nearly doubled its sales in the corresponding quarter, at the worst of the crisis.

The first quarter is always seasonally weak, but I expect a significant surprise in second quarter guidance. I believe that Camtek will guide to a rise in sales to above $20 million with significant profit, and within another quarter it will be at a $100 million annual sales pace. Remember, among other things, Camtek specializes in inspection systems for LED chips, and that sector has seen, and will see this year, huge investments by Cree (NASDAQ:CREE), Samsung (OTC:SSNLF), and Taiwan Semiconductor Manufacturing Company Ltd. (NYSE:TSM). Camtek has very big potential with those three.

If we assume that there is no crisis around the corner in the printed circuit board and chips sector, and those markets grow next year as well, then Camtek's current market valuation of $90 million seems to me to be a very good entry point for someone not yet invested in the company.


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

Published by Globes [online], Israel business news - www.globes-online.com - on November 17, 2009; Reprinted on Seeking Alpha with permission

© Copyright of Globes Publisher Itonut (1983) Ltd. 2009