Mellanox Is 'Well Levered To Data Growth,' Leading To Credit Suisse Upgrade

• 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:

1. 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.
2. 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
3. Concerns surrounding Intel Corporation INTC being a new entrant appear over inflated
4. 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:

1. With the overall TAM increasing, there is room for multiple players
2. Checks indicate Intel’s “more proprietary/closed architecture is causing some angst”
3. 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.