Mellanox Is 'Underappreciated,' BofA Says In Bullish Initiation

Shares of Mellanox Technologies, Ltd. MLNX, a supplier of computer networking products, have added over 10 percent year-to-date. The shares have 47-percent incremental upside potential, in Bank of America Merrill Lynch's view.

The Analyst

Analyst Vivek Arya initiated coverage of Mellanox with a Buy rating and $105 price target.

The Thesis

Mellanox is uniquely positioned to benefit from secular data growth, as it supplies high-performance interconnect solutions with a total addressable market of over $10 billion, as well as high-speed ethernet solutions for data centers, which is a smaller market, Arya said in the Wednesday initiation note. (See his track record here.) 

Mellanox has less than 10-percent market share in ethernet solutions, the analyst said. 

Arya is of the view that the Street is underestimating Mellanox's potential to grab market share in ethernet, which will likely lead to 15-percent growth — outperforming the 5-10-percent growth of the overall semiconductor industry.

Israel-based Mellanox is among the few semi names that are immune to both direct tariffs and industry cyclicality, giving it a rare positive bias in the near term, Arya said.

The company is required to hit certain operating margin targets or risk a loss of another board seat, according to its agreement with activists.

"Trading at just 15x, 30 percent below prior levels (of 20x since 2010) and data center peers at [greater than] 20x, we believe MLNX's near-term upside and long-term potential to generate $8-plus in EPS by 2020E is underappreciated," Arya said. 

Mellanox could benefit from potential industry consolidation, the analyst said. 

The Price Action

Mellanox shares were down 0.33 percent at $71.22 at the time of publication Wednesday.

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