I’m adding LanOptics Ltd. (Nasdaq: LNOP) to my portfolio. I’ve written a lot about LanOptics in recent months, but I hesitated to add it to my portfolio because I thought that its market cap was too high. Until recently, it was a company that could have been defined as a start-up, without substantial sales.
I recently visited LanOptics subsidiary, EZchip Technologies Ltd. in Yokne’am, and I can tell you with assurance that the train has left the station. In other words, I think that the risk in investing in LanOptics has fallen dramatically. It is often better to get on the train at the first station; in other words, to pay a higher price, but to get peace of mind, because you know that the trip is underway, and you won’t be left behind. LanOptics owns 60% of EZchip, which is its sole asset.
No analyst covers EZchip, which is developing processors for communications networks. On the other hand, the company has had unprecedented coverage that is far greater than many analysts of small investment houses could contribute to it. One US site well-known among tech stock investors is George Gilder’s Gilder Technology Report, which I would practically call an “EZ site” because over half the material written there by Gilder and members of his forum, most of whom have a thorough knowledge of engineering, is devoted to the EZ dream.
I was asked by American-Israeli investor Avi Armon to accompany him to Yokne’am. Armon has been a member of Gilder’s forum since the good old days of the bubble.
We’re talking about a processor designed for communications infrastructure, and for a person like myself, who lacks an engineering education, this is usually a black box. Even after a two-hour meeting with EZchip president and CEO Eli Fruchter and CFO Dror Israel, I still didn’t really get it.
I finally understood only when I asked Fruchter to show me the marvelous (and expensive) processor that he is manufacturing at Taiwan Semiconductor Manufacturing Co. Ltd. (NYSE:TSM). The processor once cost $700, but has since fallen to $400, and very large customers are buying it for $250. We went to the laboratory, where Fruchter showed a large communications card that resembled a computer motherboard.
In the middle of the card, like an Intel Pentium processor, lies EZchip’s next-generation NP2 processor, the receiver that is the core that processes communications network traffic in the same way that the Pentium processor does for the personal computer.
When I saw the communications card with the EZchip heart, I understood why Gilder has said for so many years that this company will be the next Intel. According to Gilder, the future communications network will be very fast, and within a few years, this will be the real computer in our house. He therefore says now that in the future there will be only one computer company in the world, which will be Cisco Systems Inc. (Nasdaq:CSCO), because it is virtually the exclusive supplier of equipment and software for this network. He says that Cisco’s entourage will be huge content warehouses Google Inc. (Nasdaq:GOOG), Yahoo! Inc. (Nasdaq:YHOO), and Ask.com (IACI).
EZchip only began substantial commercial deliveries in the third quarter of this year, reporting $2.1 million in sales. Research companies have marked 2008 as the year that EZchip’s market will become significant, at $700 million. A third of this figure will be for high-speed processors - EZChip’s specific niche.
The experts believe that the company faces no real competitors. The YouTube era is hungry for high-speed processors, but there are a lot of obstacles on the road, which is why this investment as been called risky but with very high chances.
LNOP 1-yr chart:
Published originally by Globes [online], Israel business news - www.globes.co.il
© Copyright of Globes Publisher Itonut (1983) Ltd. 2006. Republished on Seeking Alpha with full permission.