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Mellanox Technologies, Ltd. MLNX shares have lost 15 percent in the last six months.
- Credit Suisse’s John W. Pitzer upgraded the rating for the company from Neutral to Outperform, while maintaining the price target at $50.
- The company’s core interconnect IP supports an LT revenue CAGR of 15-20, while the stock valuation is compelling, Pitzer stated.
Analyst John Pitzer said that there were multiple drivers of upside. He enumerated them as:
- Core interconnect IP, both Infinband and Ethernet, supports a long-term revenue CAGR of 15-20 percent - Mellanox addresses a TAM of ~$8.3bn, which is expected to grow at a CAGR of around 20 percent to $12.4bn by 2017.
- New organic growth opportunities with Spectrum as well as new inorganic growth opportunities with the acquisition of EZchip Semiconductor Ltd EZCH, which could boost the long-term revenue CAGR to 20-25 percent
- Concerns surrounding Intel Corporation INTC being a new entrant appear over inflated
- Compelling valuation
In 2015, Mellanox raised its CY16 EPS estimate from $2.23 to $3.00. Pitzer pointed out, however, that the shares remained “essentially flat,” implying a P/E reduction of around 25 percent versus the overall sector, which witnessed a multiples increase of around 25 percent.
“The multiple contraction reflected elevated concerns that INTC is poised to enter the market with their Omni-Path solution in 2016,” Pitzer wrote. He added, however, that:
- With the overall TAM increasing, there is room for multiple players
- Checks indicate Intel’s “more proprietary/closed architecture is causing some angst”
- Although Intel is likely to take share, it will also broaden the market
In addition, the acquisition of EZchip Semiconductor seems more likely and could add around $1.00 to EPS, the analyst mentioned.
The adjusted EPS estimates for 2016 and 2017 have been raised from $1.73 to $2.80 and from $1.99 to $3.12, respectively.
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