After many years of following the market, I've gotten used to the fact that every earnings season on Wall Street, even in the best of times, when the smaller companies start to report, we'll always get knocked in the head once or twice because of a miss here or there, and it will always come from a company which you never dreamed would do it.
Investors treated Mellanox last week like a new car which suffered its first accident, and its market price immediately dropped by tens of percentage points. Until then it was considered a momentum stock which deserves a high multiple, because nearly every quarter since it went public, the company reported stronger results than the previous quarter.
What may not have appeared to founder and CEO Eyal Waldman as a big deal - a miss by only $5 million looking to the third quarter, so that instead of forecasting $42 million, sales were only forecast to reach $37 million, was taken as a serious crash by Wall Street.
Wall Street investors also reacted with fury because the lower expected revenue was accompanied by a deliberate process of raising R&D and other expenses, which together will seriously cut into earnings per share for the third quarter. So, based on the roach law, investors wiped off nearly a quarter billion dollars from Mellanox's market value. The "roach law" states that if someone sees one roach in the house, they can assume that there are many others as well, which so far have not been seen. In this case, it means that if a company misses with one quarter, there will be more misses to come.
After I heard the conference call in English and in Hebrew, and having spoken with the CEO, I am quite convinced that this is a one-time deal that comes from a change which is actually good in the middle to long term. A large server maker, who is also a customer representing around 15% of sales - JP Morgan says it is HP (NYSE:HPQ) - decided to implement Mellanox's solutions by permanently mounting its chip on the motherboards for all its servers of a certain type, at a cost of tens of dollars per chip. This was instead of buying expensive electronic cards from Mellanox at a cost of hundreds of dollars per card, which until today have only been offered as an option to server buyers.
In the course of about a quarter, this change will lead to smaller sales by Mellanox to that customer, and an overall hit of about 10% in third quarter sales. On the other hand, Waldman estimates that already in the fourth quarter, chip sales to that customer will grow significantly, because there will be a significant boost in the quantity of servers that will be sold by that customer. Together with the growth that is expected to continue as usual at other customers and with other products, Mellanox expects to return to its customary reporting of sales growth in the fourth quarter.
Another company that I hold in my portfolio tracked at "Globes" offered a big surprise last week - SanDisk Corporation (Nasdaq:SNDK). The company announced the retirement at the end of the year of chairman and CEO Dr. Eli Harari (from all his roles). Harari will continue to consult for the company for anther two years.
I don't buy this resignation as a given for a number of reasons. Harari always said that until he founded SanDisk at a relatively late age, 45, he failed at nearly everything he did in the business sector. That is, while biologically he may have reached retirement age, from an emotional standpoint he was at an age where he was able to keep going, relative to the age at which he founded the company.
Speaking with analysts, Harari said that the Fab 5 will need investments of billions of dollars, because it will be not only huge but also set for technologies that will replace NAND.
It may be that the SanDisk board told Harari that they were not ready to raise that kind of money as an independent company, after struggling through the crisis of 2008, which among other reasons was because of giant investments. So they may prefer to do this only as part of a giant corporation with deep pockets -that is, to sell SanDisk. Maybe that is why Harari will leave all his posts at the company, and leave them the work of selling the company next year - a very painful move for him.
Disclosure: 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