Mellanox Makes More Sense For Investors After EZchip Buyout

Barclays' Joseph Wolf reinitiated coverage of Mellanox Technologies, Ltd. MLNX with an Overweight rating and price target of $58, following the EZchip acquisition.

Wolf expects the acquisition to be accretive from the first year itself. However, as a standalone entity, EZchip's "core revenue base is very concentrated and exposed to lumpy carrier capex trends," while its new product is "unproven though potentially attractive."

The analyst believes that as a part of Mellanox, the telco concentration risk has been diluted for the short term, with core EZchip revenues accounting for only 15 percent of the total revenues.

"EZCH's new products are targeted at the enterprise/whitebox/and data center markets. These are new end-markets for EZCH product but have been the core market for MLNX and we see potential for the combination to help develop the new business," according to the Barclays report.

The combined entity is expected for have a 2017 TAM of over $14 billion, while the geographic and cultural similarities are likely to limit integration risk and help achieve cost synergies.

In addition, customer overlap between the two companies is minimal, given that Mellanox provides layer 1-3 technology to datacenter and HPC end markets, while EZchip pffers layers 2-7 technology mainly to carrier networks.

"EZCH will accelerate MLNX's intelligence offerings in its current product line-up," the analyst added.