Shares in EZchip (Nasdaq: EZCH) plummeted 14% on Thursday to $13.81 on turnover of nearly 1 million shares, after Jeffries and Company analyst Adam Benjamin began coverage of the company with a "Hold" recommendation and a target price of $18.
EZchip founder and CEO Eli Fruchter didn't dream that it would be through the first formal investment house research report that he would learn, apparently for the first time, that his biggest customer, Juniper Networks (Nasdaq: JNPR), is set to abandon EZchip and independently develop a processor, instead of moving to the next generation of EZchip processors.
Benjamin threw out that bomb on Thursday, and since then it has made big waves among EZchip investors, especially on George Gilder's forum, whose members were in shock. Remember, there are three producers of routers who together have the lion's share of the market, and EZchip supplies processors to two of them, Juniper and Cisco (Nasdaq: CSCO), and investors have been waiting for years for the third Alcatel-Lucent (NYSE:ALU) to join them.
Now it seems that Juniper has decided to step away.
Jeffries knows EZchip well, and about a year ago they signed an agreement with two institutional investors who together own about 21% of the company's shares, under which Jeffries will handle the sale of their shares should those investors decide to sell. Nonetheless, it can be understood from the report that Jeffries received its information on Juniper's intention to abandon EZchip from sources close to Juniper, not from EZchip sources. Fruchter always said that his real competition is from the internal development staffs of his existing customers rather than from other processor makers.
Juniper currently buys EZchip's second generation of processors, NP2, and so far has not chosen the third generation, NP3. A specific variation of NP3 is currently supplied to Cisco. Juniper also hasn't picked the fourth generation, which Cisco is believed to be on the way to using.
Apparently we will have to wait about another month, for EZchip's second quarter results, in order for the picture of EZchip's current and future customers to clear up. Until then, the stock can be expected to ride a roller-coaster, and can slip even further, since it is not clear how the intervening period over the next year will play out, as the company moves from one large customer (Juniper) to one very large customer (Cisco).
Published by Globes [online], Israel business news - www.globes-online.com - on July 7, 2009
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