21 June 2015
According to Bloomberg Mellanox Technologies Ltd. is trying to make network hardware sexy.
At a lavish party at Manhattan’s One World Observatory that featured roaming oyster shuckers, a self-styled supernatural entertainer and attractive female hostesses, Chief Executive Officer Eyal Waldman unveiled the upstart company’s newest weapons aimed at expanding its share of the $6 billion data-center business.
“If we execute, we’ll take the market,” Waldman told Bloomberg Television on June 18, the day after the party.
Waldman is trying to jump ahead of competitors such as Intel Corp. and Broadcom Corp. by selling data-center switches that can move information at the fastest speed in the industry, according to Stifel Nicolaus & Co.
“They’re using the right strategy,” said Kevin Cassidy, a Washington-based Stifel analyst. “Rather than coming in at the same speed as everyone else, they’re entering the market at the high end.”
Mellanox’s earnings have mostly been driven by server upgrades for high-performance computers that use processors made by Intel. Data-center owners like Facebook Inc. replace their hardware when Intel — which has more than 98 percent of the market — brings out an improved version of its Xeon chips. The companies usually replace supporting equipment, including Mellanox products.
Most of Mellanox’s rally this year is tied to Intel’s latest server upgrade, known as Grantley, said Srini Nandury, an analyst at Summit Research Partners in Summit, New Jersey. The upgrade is fueling demand for Mellanox InfiniBand products, which direct the flow of data-center information.
Shares of the Yokneam Elit, Israel-based company have rallied 17 percent this year to $49.98. That compares with an 8 percent gain in the Nasdaq Composite Index and a 5.3 percent increase in the Philadelphia Stock Exchange Semiconductor Index. The Bloomberg Israel-US index is up 10 percent year-to-date.
At the June 17 party at the observatory atop 1 World Trade Center in Lower Manhattan, guests wandered past glass cases holding Mellanox network equipment while helping themselves to an open bar. Chefs served short-rib ravioli and focaccia bread sprinkled with truffle oil.
Lior Suchard, an Israeli mentalist who has shocked Larry King, Jay Leno and Kim Kardashian with his ability to read minds, entertained a crowd of mostly male industry analysts, clients from companies such as International Business Machines Corp., and Mellanox engineers flown over from Israel. He laced his performance with plugs for the company’s new switches.
Mellanox’s first-quarter earnings beat analysts’ estimates, and revenue is forecast to climb 37 percent this year to $635 million, and 12 percent in 2016, according to the average estimate of 12 analysts.
Potential revenue from sales of the new Ethernet cards and switches Mellanox unveiled last week won’t materialize until at least 2016, Nandury said. And Mellanox’s head start doesn’t mean competitors are out of the picture.
“It’s great that they can execute on the road map, that they’re executing on the product side, but the market still has to catch up,” the Summit Research analyst said.
Intel’s server upgrade for supercomputers should drive Mellanox sales for another three or four quarters, according to Nandury, who has a buy rating on the shares and a $60 price target. About half of the 15 analysts covering Mellanox recommend buying the shares, according to data compiled by Bloomberg.
Mellanox’s reliance on the Intel upgrade still makes some analysts skeptical. The company trades at 20 times 12-month future earnings, compared with an industry average of 18.
James Kisner, an analyst with Jefferies LLC in San Francisco who has a hold rating on the stock, wrote in a June 17 report that his firm is waiting for “more evidence that Mellanox is making significant progress in driving adoption of its Ethernet switches.”
Mellanox has also rallied amid a record year for mergers and acquisitions in the chipmaking industry. Santa Clara, California-based Intel agreed to buy Altera Corp. for $16.7 billion earlier this month to defend its presence in data centers. The largest deal ever in the $300 billion semiconductor business was announced a week earlier, when Singapore-based Avago Technologies Ltd. agreed to buy Broadcom for $37 billion.
If Mellanox is successful in selling Ethernet switches for data centers, it may become a more attractive acquisition target, Sergis Mushell, an analyst with Gartner Research, said in an e-mailed response to questions.
Waldman insists he wants Mellanox to stay independent.
“We’re a generation ahead of Intel, Broadcom and other competitors we have,” he told Bloomberg TV. “We can grow faster as an independent company.”