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As we enter the last third of the fourth quarter, the profit warning season is upon us once more. The semiconductor sector, which led the warning parade in the third quarter, again looks problematic. This is a result of the floods in Thailand, which came on top of an economic slowdown that was already seen on the horizon by last summer, and the usual woes of the PC industry. That has been reeling ever since Apple (AAPL) reinvented the tablet computer category with the launch of its iPad line in the spring of 2010. Tablets have been thriving since then, and computer manufacturers are pinning great hopes on "Ultrabook" computers as a growth engine due to kick in from mid-2012.

Component producers that rely mainly on makers of tablet computers that compete with Apple's iPad are liable to issue profit warnings, especially after Research in Motion (RIMM) revealed in its warning released last week that it was writing off nearly $500 million because of the failure of its first tablet. Even selling it at loss-making prices could not clear the large remaining stock. On Wednesday and Thursday this week, we will gain an insight into the state of all the technology sectors as the quarter draws to a close, from the managers of the many companies that will present at the Barclays Technology Conference in San Francisco.

Among the Israeli companies I hold in my portfolio, Mellanox Technologies Ltd. (Nasdaq:MLNX), Ceva Inc. (Nasdaq:CEVA), Orbotech Ltd. (Nasdaq: ORBK), and EZchip Semiconductor Ltd. (Nasdaq: EZCH) will present at the conference.

Mellanox, founded by Eyal Waldman about a decade after he left Galileo, is due to join the Tel Aviv 25 list on December 14, and, together with NICE Systems Ltd. (Nasdaq: NICE), it will represent the Israeli technology industry among the 25 largest companies.

Early this year, Mellanox crossed the billion dollar market cap line, and, on the eve of its accession to the Tel Aviv 25 list, its market cap is close to $1.5 billion. If anyone has doubts about the high P/E ratio that investors give the company, they should take a look at the spicy sales multiple at which SAP bought a niche U.S. player in cloud computing software-- SuccessFactors (SFSF), which is still making losses.

The enterprise cloud computing revolution is considered the biggest since servers started replacing mainframes decades ago. As always happens in revolutions, big companies become gorillas, and others are swallowed up or wiped out if they make a wrong move. Does anyone remember, for example, a sexy computer company called Digital, which ran rings around IBM? Today, everyone knows that the way to survive is through the right mergers and acquisitions, and so the prices of the good companies are sky high.

SAP is paying $3.4 billion for a company that-- next year-- will have sales of around $400 million, and will earn a few cents per share, but which nicely completes its cloud computing puzzle. A move like this by a gorilla like SAP raises multiples for all stocks in the field, including Mellanox, even though Mellanox is not a provider of software for cloud computing, but of infrastructure solutions that support more effective cloud computing.

With the company being an expensive momentum stock, Mellanox managers must be vary careful over their communications with Wall Street, because a slight miss on results or guidance, as happened once in 2010, will lead to an unpleasant "haircut" for the share price-- even if it's only temporary. For example, in the short term there is a certain concern that a postponement of the launch of Intel's (INTC) Romley server processors to March 2012 could cause a postponement of projects in which Mellanox is involved, and that are due to be carried out in the coming months.

Published by Globes [online], Israel business news - www.globes-online.com - on December 5, 2011 Reprinted on Seeking Alpha with permission © Copyright of Globes Publisher Itonut (1983) Ltd. 2011

Disclosure: No positions

Source: Mellanox Not Overvalued When Considering SAP's Recent Buy