Yokne'am is under attack. Two processor companies that made the big leagues in the past two years, Mellanox Technologies Ltd. (Nasdaq:MLNX; TASE:MLNX) and EZchip Semiconductor Ltd. (Nasdaq: EZCH; TASE:EZCH), were under attack by short sellers last week, sending the share price of both companies down 7%. There is no doubt that the two companies, located across the street from each other in the town, will be data transmission infrastructure stars in the years ahead, and what they are going through now will sooner or later be forgotten.
EZchip's story is much simpler than Mellanox's. EZchip has investors with four million short shares, a huge position which they entered into during the summer, when they thought that the company would report a poor fourth quarter. Today, they know that their time is running out if they do not close their position soon, because the company will have a better fourth quarter than assumed. Within a few months, reports will begin flowing about strong progress on the new NPS line of processors, which have huge potential, developed in Kiryat Gat.
Last week, to create an air pocket in the share price, which will allow the short sellers to close part of the position, they initiated a very negative article on "Seeking Alpha", which did some damage, and may have saved them a few hundred thousand shares. Basically, the article questioned EZchip's market potential, including the risk of competition from chip giant Broadcom Corporation (Nasdaq: BRCM) and others.
I know that Broadcom is trying to compete against EZchip through Israel's Dune Networks, which Broadcom acquired three years ago. But I believe that EZchip is now in a place for high-speed processors where Broadcom cannot catch up, in the same way that Intel Corporation (Nasdaq: INTC) gave up and quit this market a few years ago.
No one denies that EZchip is an expensive share, which investors price on the basis of its huge potential, which has a good chance of materializing in the coming years. The risk of the pricing is mainly on the customer side; in other words, if, for example, Cisco Systems Inc. (Nasdaq: CSCO) decides, like Juniper Networks Inc. (Nasdaq: JNPR) decided before it, to develop its own network processors in-house, instead of relying on EZchip. But I think that when it is heard that Cisco is collaborating with EZchip in Kiryat Gat, which I think will happen, then this worry will disappear altogether.
Other potential competitor to EZchip could come from Alcatel-Lucent SA (NYSE; Euronext: ALU), if it like Nortel before it, faces bankruptcy and sells its highly regarded network processor division to a chip giant. Alcatel-Lucent is developing advanced network processors, but only for its own routers, which compete against the routers of Cisco, Juniper, and Chinese equipment makers.
Mellanox's perfect storm
Mellanox is caught in a perfect storm, which to date has halved its share price from its peak earlier this year when it rode the perfect wave of the potential of big data and cloud computing. "Globes" has reported rumors of a profit warning, but I have no idea whether there is anything in it, while across the pond, Jim Cramer has done something that I would dare to call despicable.
A company's bookkeeping is the most sensitive thing imaginable, and Cramer dares to assert on live television after the markets closed on Friday that he considers the departure of Mellanox CFO Michael Gray to be suspicious, and that he rejects the company's statement that he left for personal reasons to mean what it says. Cramer did not elaborate about exactly why is worried about investing in Mellanox at its current share price, since he personally came of the fence to recommend it at $120 a share.
God alone knows what is behind Cramer's deluded remarks about Gray's departure, which was announced in early September. Gray left after eight years of hard work at Mellanox, which operates worldwide. He led its successful IPO five years ago, and when the company reached heights the likes of which were never seen in such a short time.
I tend to believe that Cramer knows little about Mellanox, and as a television commentator, he creates unfound drama. Four years ago, I watched him "hang" then-SanDisk Corporation (Nasdaq:SNDK) CEO Dr. Eli Harari on the wall of shame in his weird studio, because Harari would not agree to sell SanDisk to Samsung at $26 per share, after which SanDisk crashed to $5 per share. But I did not see Cramer apologize when SanDisk's share recovered to $50 while Harari was still CEO.
Published by Globes [online], Israel business news - www.globes-online.com - on December 24, 2012
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