4 Israeli Firms Headed to $1 Billion

by: Shlomi Cohen

A $1 billion market capitalization is the dream of every entrepreneur who makes it to an IPO. Generally, the entrepreneur begins dreaming of that target after the company first passes the milestone which is considered the most difficult on that path -- sales of over $100 per year.

In the bubble year of 1999 and after, more than a few Israeli firms reached the $1 billion club, but did not last there - whether because the bubble burst or because of company-specific crises. Examples are Orckit (Nasdaq: ORCT), Alvarion Ltd. (Nasdaq: ALVR), AudioCodes Ltd. (Nasdaq: AUDC), Radware Ltd. (Nasdaq: RDWR), or Zoran Corp. (Nasdaq: ZRAN), which was sold yesterday.

On the other hand, there were those that joined the $1 billion club in the years of the bubble, and are still there today, despite ensuing crises. Those are companies like Teva Pharmaceutical Industries Ltd. (Nasdaq: TEVA), Check Point Software Technologies Ltd. (Nasdaq:CHKP), Comverse Technology Inc. (NASDAQ:CMVT), and Verint Systems Inc. (NASDAQ:VRNT).

Obviously there were companies which made it there and were sold at a valuation of more than $1 billion, companies like Galileo, msystems, and Mercury.

Assuming that there won't be a global crisis this year, I believe that four of the Israeli firms that I hold in my portfolio tracked by "Globes" have a good chance of passing the $1 billion valuation level during the year. They are Mellanox Technologies Ltd. (Nasdaq:MLNX), Radware, Protalix Biotherapeutics Inc. (AMEX:PLX), and EZchip Semiconductor Ltd. (Nasdaq:EZCH). Two companies in good position to reach that level in 2012 are Orbotech Ltd. (Nasdaq:ORBK) and Ceragon Networks Ltd. (Nasdaq:CRNT), because both of them are in strategic processes this year that will yield results next year.

Among the first four companies, Mellanox is really close, because at a price of $30 per share, it would already be at a market cap of $1 billion. The merger with Voltaire, completed this month, puts Mellanox at a promising starting point for 2011. New guidance that management provided for the first quarter does not tell anything of the added value that will soar from this merger over the coming year, as a result of the leading position and economies of scale for the merged company in the InfiniBand field.

Specifically, it will be one customer, Oracle (Nasdaq: ORCL) which also owns 10% of the shares, that will push Mellanox significantly above the $1 billion value this year. In the most recent conversation with analysts, Mellanox founder and CEO Eyal Waldman said that Oracle may be a customer of 10% per year, but from reading analyst surveys about the growth rate of sales expected this year of the two Oracle platforms built on Mellanox's InfiniBand - Exadata and Exalogic - it is reasonable to assume that Oracle will be a very significant customer.

Radware will apparently reach the $1 billion market cap mark in the second half of the year (at $50 per share), based on the current acceleration in two connected sectors, with which it is connected as a company that deals in directing network traffic. On one hand, there is a growing switch by enterprises-- though still in its early stages-- to use cloud computing platforms, a move which increases the need to direct network loads. On the other hand, there is a growing need for security solutions that flows from enterprise reliance on information "in the clouds". This need received huge support last month from the WikiLeaks story.

As far as Protalix goes, already this week, with the US Food and Drug Administration (FDA) decision on Friday, we will know if the company will make it to a market cap of over $1 billion this year, compared to a current market cap of $800 million. This is despite the fact that the company has not sold even one dollar's worth for an approved drug.

The tension ahead of the FDA decision on Friday will reach its peak, although I don't know a single analyst or expert who expects that Protalix's first drug based on its revolutionary platform will not be approved. But having seen a similar situation at Pharmos, with a $400 million valuation on the eve of the authorization, I am prepared for all scenarios.

On one hand the authorization seems certain, but on the other hand there is the question of why the short interest on the eve of authorization is so high, at 6 million shares. Also, why has one of the most enthusiastic investors, who pushed Protalix in its first days as a public company - Teva Pharmaceutical Industries Ltd. Chairman Dr. Phillip Frost - sold most of the shares he owned, and is already not a party at interest in the company on the eve of authorization? Even giant fund manager Fidelity reported that in the quarter ended in December it sold 1.8 million shares out of the 2.9 million that it owned.

Among analysts, only UBS raised the concern that maybe the authorization will be accompanied by what is called a limited indication, which is essentially a usage warning due to side effects, which can limit potential sales of the medication.

Finally, EZchip, which trades at a market cap of around $750 million, should flirt with a $1 billion market cap in the second half of the year, based on the great optimism exuded by founder and CEO Dr. Eli Fruchter when presenting the company results. The fourth generation of its network processors will begin to yield higher sales then, through-- among other ways-- agreements the company has with Marvell Technology Group (Nasdaq: MRVL).

It will be a generation of much more powerful processors, and therefore also more expensive ones. This will lead to much higher profitability than from previous generations. According to rumors, from this summer, this generation will power the information flow of several new platforms of Cisco (Nasdaq: CSCO), among other things.

Published by Globes [online], Israel business news - www.globes-online.com - on February 22, 2011 Reprinted on Seeking Alpha with permission © Copyright of Globes Publisher Itonut (1983) Ltd. 2011