Analyst: Activist Investor Starboard's Involvement Makes Mellanox 'Shareholder-Friendly'

Israel-based computer networking products supplier Mellanox Technologies, Ltd. MLNX has strong growth prospects in Ethernet, a Loop Capital Markets analyst said.

The Analyst

Loop Capital Markets analyst James Kisner initiated coverage of Mellanox with a Buy rating and $84 price target.

The Thesis

Mellanox is likely to benefit from the adoption of its high-speed Ethernet network interface cards and switches by hyperscale internet and web 2.0 companies, Kisner said in a Monday note. The Ethernet business now accounts for about 50 percent of the company's revenues, the analyst said. 

Mellanox expects its Ethernet NICs to grow faster than 25 percent in calendar year 2018, Kisner said. The analyst also sees Ethernet switching as a particularly attractive opportunity. Kisner expects the company's spectrum Ethernet switch to grow from an estimated $54 million in 2017 to $110 million in 2018.

That said, the growth prospects for the company's Infiniband business are somewhat muted given the competitive environment, especially with Intel Corporation INTC's focus on the high-performance interconnect business and the launch of its Omni-Path interconnect, Kisner said. 

"We expect ongoing Omni-Path adoption will remain a headwind for Mellanox's IB business over 2018," the analyst said.

The involvement of activist investment firm Starboard Value, which picked up a 9.8-percent-stake in the company, is a positive catalyst, according to Loop Capital Markets. 

"It seems to us that Starboard's involvement is already helping Mellanox be more shareholder-friendly, and we believe it's possible Starboard's involvement could also result in a sale of the company," Kisner said. 

The Price Action

Mellanox shares are up about 36 percent over the past year, with much of the gain coming in late 2017.

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Photo courtesy of Mellanox.