MLNX - Mellanox - Company Profile

Mellanox Technologies, Ltd. is a fabless semiconductor company that designs, manufactures, and sells interconnect products and solutions. The company's products are used for computing, storage, and communications applications in the high-performance computing, storage, financial services, enterprise data center, and cloud markets. Its products facilitate data transmission between servers, storage systems, communications infrastructure equipment, and other embedded systems. The company offers 40/56/100Gb/s InfiniBand solutions, including switch and gateway integrated circuits (ICs), adapter cards, cables, modules, and software, as well as switch, gateway, and long-haul systems; 10/40/56Gb/s Ethernet solution for use in EDC, HPC, embedded environments, hyperscale Web 2.0, and cloud data centers; and 10/25/40/50/56/100Gb/s Ethernet NICs. It also provides adapters to server, storage, communications infrastructure, and embedded systems original equipment manufacturers (OEMs) as ICs or standard card form factors with PCI express interfaces; and switch ICs to server, storage, communications infrastructure, and embedded systems OEMs to create switching equipment.

Mellanox is the leader in their area. While Intel has been having trouble with a 100Gbs communications product, Mellanox is preparing to market 200gbs and 400gbs products early in 2017. With larger volumes of data being transmitted over the internet and from server to server to cloud and to backup systems, the need for ever faster communications products will only grow faster.

I added a separate cloud backup application several weeks ago to backup a backup server with 9.3 million files and 3.5 terabytes of data. I have a relatively slow 25 megabyte per second uplink speed from this particular backup server. This cloud backup has been running for 3 weeks and has 22 days to go to complete the first full backup. After that it will only take an hour of so per day to update the files that have changed. Now multiply this by the millions of other users who are doing the same thing every day. The need for superfast computer-to-computer communications in the datacenters is going to continue to grow exponentially. Mellanox is the bleeding edge technology in this sector.

For Q2 the company reported earnings of 87 cents and revenue of $214.8 million. That was growth of 16% and 23% respectively. Analysts were expecting 83 cents and $212.9 million. They guided for Q3 to revenue of $221-$227 million and analysts were expecting $225.8 million.

Shares plunged -10% because InfiniBand revenue declined -3% to $111 million but Ethernet sales rose 126% to $88.1 million as their new products gained market share in that area. InfiniBand sales were pressured by competition from Intel. The Intel product is inferior so they have to discount it compared to the Mellanox product to protect their market share. That reduces the revenue for Mellanox because they are competing on price with Intel for the older technology products.

When they debut their new 200gbs and 400gbs products early in 2017 there will be no material competition. Summit Redstone analyst Srini Nandury said the Intel threat is "overblown" and Intel faces a relentless uphill battle because of the pace of Mellanox innovation. "This is an inherent disadvantage for Intel. Intel is forced to use pricing to maintain market share." Nandury reiterated his $65 price target on MLNX.

Shares crashed from $52 to $45 on the earnings and worry about Intel discounting their competitive products. Because Mellanox has these fast products in the pipeline, I doubt the shares will remain at this level for long. I am going to put an entry trigger on the play at $46.65. If shares continue lower, I will adjust that trigger and the strike price in future newsletters. If they continue lower, it would be nice to enter a position at support at $41.

Some of our best positions come from buying headline related dips. I believe this will be one of those positions.

With a MLNX trade at $46.65

Buy Jan 2018 $50 call, currently $7.70. No initial stop loss. Once in the position we can sell a short put to offset the cost of that premium.



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