Why the jump in EZchip?

Shlomi Cohen

It's not because the company is for sale. Plus: Positive news for stocks in my portfolio from Barcelona, and elsewhere.

A technical correction on Wall Street would not have surprised anyone, with the Nasdaq 13% up since the start of the year, but it didn't happen even in the shortened trading week last week, because, thanks to a strong following wind from more better-than-expected macro data, the bulls refuse to give the bears a chance, and the week ended with the indices slightly higher.

In some cases last week, the bulls simply stampeded over the bears, such as in the case of EZchip Semiconductor Ltd. (Nasdaq: EZCH; TASE:EZCH), which rose by more than 8% over the four sessions, so that the company has consolidated nicely above the astonishing market cap of $1 billion, without announcing anything, and following tepid results and guidance released early in the month.

As usually happens when any share suddenly jumps, an analyst from the small investment house Chardan Capital Markets hastened to come out with the hypothesis that EZchip is about to be sold. In my humble opinion, the chances of this happening are just about zero, because I know of no sane CEO who would buy a company whose sale value would be at least $1.5 billion, when its annual sales are well below $100 million; certainly not just a few months after Marvell Technology Group (Nasdaq: MRVL) bought a similar company for under $100 million.

But the real reason that EZchip has not hung a "For Sale" sign on its building in Yokne'am is that founder and CEO Eli Fruchter, like his neighbor Eyal Waldman at Mellanox Technologies Ltd. (Nasdaq:MLNX; TASE:MLNX), broadcasts the message to anyone prepared to listen that he is here for the long haul. Fruchter and Waldman aim to build giant companies on the basis of unique technologies in the hottest aspects of data communications, and not to be swallowed up by some US giant or other.

It's true that neither of these founders controls his company, but both companies are of the sort that are not usually acquired without the agreement of the management and the heads of the development team, because the technologies involved are very complex. As we know, in Mellanox's case, Oracle (ORCL) decided to buy 10% of the company last year via the stock exchange, because it understood that Mellanox was not for sale, even though Oracle's Larry Ellison is not one to accept a refusal to sell without a fight.

In my view, EZchip's share price rose because hedge funds bet against it just before its results, with short positions that reached a total of more than 2 million shares, and they have no choice but to get out fast. They know that there won't be any bad news in the near future, but there might be some big surprises, such as, for example, launches of new platforms by Cisco (CSCO) that are powered by fourth generation EZchip processors, which will lead to a rapid acceleration in sales from the second quarter.

This week, in Barcelona, they will be celebrating the launches of new smartphones, but what mainly interests me are the chips in those devices from the companies I hold in my portfolio that should join in the party. HTC, for example, which had a tough year in 2011 because of the almost impossible competition from Apple (AAPL), hopes to succeed this year with the launch of its One series, unveiled in Barcelona yesterday. It looks very promising. One of the phones, the X model without LTE, is based on an Intel (INTC) communications processor and a signals processor from Ceva Inc. (Nasdaq:CEVA); LSE:CVA).

Ceva also announced an agreement with Chinese communications processor company Spreadtrum (SPRD) under which the latter's fourth generation products for LTE devices will be based on Ceva's signals processors. Ceva receives double the royalties on the fourth generation products that it received on Spreadtrum's third generation products, and Spreadtrum reports a 50% market share of third generation TD-SCDMA standard chipsets in China. Ceva now has more than fifteen licensing agreements for fourth generation processors around the world.

SanDisk Corporation (Nasdaq:SNDK) came out with some important announcements in Barcelona today, among them a collaboration agreement with Intel, which is leading the Ultrabook wave of computers that will hit the market later in the year with the new Windows 8 operating system from Microsoft (MSFT) and SSDs (solid state drives), for which SanDisk will be an important supplier. Analysts are starting to believe that mass swapping of laptops for Ultrabook computers is inevitable, starting at the end of this year and continuing for several years more.

In smartphones, it has been known for some time that SanDisk provides solutions to just about every manufacturer attending the Mobile World Congress in Barcelona that is launching a new device, including to the Chinese manufacturers, but in my view it supplied the most intriguing news about the company that is not at Barcelona, Apple, in a broad hint on its analysts day ten days ago.

Apple itself has already officially announced that SanDisk is its supplier, but up till now we knew from device dismantling websites that this was only for iPods. On a clear slide at the analysts day, Dan Inbar, who is senior vice president and general manager of OEM, as well as SanDisk's Israel country manager, showed an iPhone and an iPad with the caption "How SanDisk is Winning", and it is not usual to present a slide like that unless you are really in there.

The undisclosed agreement that apparently exists between Apple and SanDisk was at the center of the drama of the arrests on charges of insider trading in New York last week. A former SanDisk employee admitted giving inside information to do with SanDisk and Apple to a consultant to hedge funds, who warned the funds at that time not to sell SanDisk short, when SanDisk has been a favorite of the short players for many years.

Published by Globes [online], Israel business news - www.globes-online.com - on February 27, 2012

© Copyright of Globes Publisher Itonut (1983) Ltd. 2012

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