Some questions for Mellanox

Shlomi Cohen

I rule out wrongdoing, but Mellanox CEO Eyal Waldman could have handled the profit warning in a less damaging way. Plus: Sodastream joins the portfolio.

The week ahead is the first really busy one of the new year, with a huge electronics exhibition in Las Vegas, the major medical companies conference held at the start of every year by JP Morgan (JPM) in San Francisco, and the start of the reporting season, and profit warnings too.

Among Israeli companies, Mellanox Technologies Ltd. (Nasdaq:MLNX; TASE:MLNX) and Ceragon Networks Ltd. (Nasdaq: CRNT; TASE:CRNT) have already issued warnings, and I believe there are more to come, because quite a few customers halted orders in the final quarter last year for fear that the US would tumble over the fiscal cliff.

Just about everything has already been said about Mellanox's warning, and I'd like to devote a few words to the company's dubious conduct leading up to the warning and after it.

It is clear to me that Mellanox CEO Eyal Waldman became aware that a warning of some kind was liable to be necessary a few days after the company reiterated its guidance at two investor conferences at the end of November, and a few days after Dov Baharav, a director, sold Mellanox shares not through a blind sales program. I am not one of those who think that respectable managers and directors in their right minds risk breaking the law for gain.

What is not clear to me is why Waldman gave an interview to Bloomberg on December 19, displaying confidence and general optimism, when he was carrying the ticking bomb of a severe warning. And if you must be interviewed on Bloomberg, why put the interview on the CEO's personal Facebook page, which is accessible to many investors? Some reacted along the lines of, "Nice interview, but why isn't the share rising?" "Because I'm issuing a warning very soon," Waldman must have murmured to himself.

It is not at all clear to me why no warning was made public as soon as the problem with the cables was discovered, even if its full extent was not yet known? After all, there was a grievous leak here of inside information, and it isn't important where it leaked from, but much worse is the fact that it reached the short players without delay, at Infiniband speed. They had a ball with it all the way to the bank, while on the other hand there were investors who bought after they saw the abovementioned optimistic interview on Bloomberg.

Furthermore, after the severe warning, and after the share price had dropped by 60% from its peak, why tell the media "I sleep well at night", even if the intention is to radiate confidence in the company's future? Why not say, "I don't sleep at night, because I feel bad about Mrs. Cohen from Hadera, who bought the stock at $120"?

There was someone else who had a ball at the collapse of the share price, and that was Jim Cramer of CNBC. Cramer displayed a graph of the share price from its high of $111 at the time of the announcement that the company's CFO was leaving in early September, and boasted that he recommended selling the stock because of that announcement. There is clearly no connection between the warning issued in December and the announcement in September, but that's Cramer.

Farewell, RIM and Marvell; hello, Sodastream

Today, I am parting from two stocks that I have failed with, RIM (RIMM), and Marvell (MRVL), and I am adding Sodastream International Ltd. (Nasdaq: SODA) to my portfolio. Sodastream too was hit by Cramer's half-truths, in the summer of 2011. Cramer claimed then that major retail chain Costco (COST) was refusing to stock Sodastream, and the explanations of CEO Daniel Birnbaum, that his company was at the initial trials stage, after which it would be on Costco's shelves, just as it was on the shelves of many other chains, including the biggest of them all, Wal-Mart (WMT), were of no avail.

Today, Sodastream is well-established at Costco, with a special appliance that has a gas canister twice the normal size, and altogether, to my mind, it is on the brink of more substantial penetration of the huge US market. The potential is very great, because only 1% of US households currently use Sodastream, compared with much higher penetration in Europe, with Sweden in the lead at 25%.

In the final quarter of 2012, a new, advanced, designer appliance was launched in the US, one that stands a high chance of grabbing a place on the most sought after piece of real estate in the world: the home kitchen counter.

Next month, Sodastream will advertise for the first time in the prestigious Super Bowl, at an investment of several million dollars, with the aim of persuading people that it has the most economical solution for consuming carbonated drinks, one that also leads to a huge saving in the use of polluting plastic bottles.

I believe that it is highly likely that Sodastream will come close to earnings per share of $3 this year, and so, on the basis of a p/e ratio of 20, which is reasonable for a company with strong growth, the share price is likely to climb to $60 over the year, compared with just under $50 today.

Published by Globes [online], Israel business news - www.globes-online.com - on January 7, 2013

© Copyright of Globes Publisher Itonut (1983) Ltd. 2013

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