Barclays downgrades Mellanox

Eyal Waldman

Mellanox was "the most limited with regard to surprising us to the upside over the next 12-18 months."

Following a 12% rise in Mellanox Technologies Ltd.'s (Nasdaq:MLNX) share price since the beginning of 2017, Barclays Bank is recommending taking advantage of the share's strength to sell it in order to take profits. Barclays Bank yesterday downgraded its recommendation for the Mellanox share from "Market outperform" to "Underweight." Analyst Joseph Wolf wrote that among all the technologies shares reviewed by the bank, Mellanox was "the most limited with regard to surprising us to the upside over the next 12-18 months."

Mellanox's share was down 3.8% on Nasdaq yesterday, reflecting a $2.3 billion market cap. Founded and managed by CEO Eyal Waldman, Mellanox develops and markets communications equipment for high-speed data transmission on organizational communications.

Wolf predicts that Mellanox will reach or exceed the forecasts for the third quarter of the year (Barclays Bank predicted $228 million in revenue and a net profit of $0.64 per share - the same as the analysts' consensus for profit, and slightly higher in the revenue line).

"Our downgrade is in no way a call on the quarter or a call on Mellanox’s technology position," Wolf emphasizes, adding that Mellanox is a leader in the interconnect market. At the same time, he notes that the dynamics of the market have changed, and mentions several trends preventing Mellanox's technological lead from materializing. These trends include the fading of products supporting 40 gigabytes, the fact that Amazon and Google are sourcing 25/50/100 internally, and competition from Intel, Broadcom, and Cavium.

"To be sure, we see the switching opportunity, applications in AI, and the new Bluefield SOC as compelling, but not enough to produce upside significant surprise in 2018," Wolf states.

The downgrade for Mellanox was also accompanied by lowering Barclays Bank's target for the share, but by only $2 to $50, leaving the new target price 5% higher than the market price.

Ceva target price 25% above market price

The recommendation for Mellanox was part of a general quarterly review of emerging technologies that includes Israeli companies.

Barclays Bank's highest recommendation is for the share of US company Coherent, a company with a $6 billion market cap that supplies laser-based products. Wolf believes that the company's significant exposure to the OLED screens production market can support the company's growth in the coming years.

Barclays Bank recommends "Market outperform" for four Israeli companies: Ceva Inc. (Nasdaq:CEVA); LSE:CVA), Kornit Digital(Nasdaq:KRNT), Orbotech Ltd. (Nasdaq: ORBK), and Radware Ltd. (Nasdaq:RDWR). Judging by the target price that the analyst gives for these shares, Ceva has the greatest upside potential - his target price for the share is $54, 24.7% above the Nasdaq price.

Managed by CEO Gideon Wertheizer, Ceva provides chip planning technologies for the mobile communications and other markets. The company's market cap is $951 million, following a 25% increase over the past year. Wolf says that Ceva has a strong competitive position in the value chain of mobile devices, together with growth opportunities in other markets, such as Internet of Things (IoT).

Another share recommended by Wolf is Radware, managed by president and CEO Roy Zisapel and traded at a $764 million market cap, following a 37% rise in the company's share price over the past year. Radware provides solutions for availability, high performance, and security for organizational communications networks, computer centers, and apps. Barclays Bank bases its recommendation on the growth in the supply of Radware's products for the cyber security market and its strong balance sheet. According to Wolf, Radware's cyber sales already account for 35% of the company's sales.

Wolf mentions that Radware's sales are moving in the direction of cyber software and subscriptions, which are more profitable for the company, although the company is in a transitional phase, which is having a negative impact on its sales. At the same time, he believes that the downside for its market value is limited, because the company's cash is equal to half its market value. He gives a $19 target for the share, 10% higher than the market price.

Wolf makes a negative recommendation for one other Israeli company – communications equipment manufacturer Allot Communications Ltd. (Nasdaq:ALLT; TASE: ALLT). His recommendation for this share is unchanged at "Underweight."

Published by Globes [online], Israel Business News - www.globes-online.com - on October 10, 2017

© Copyright of Globes Publisher Itonut (1983) Ltd. 2017

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Eyal Waldman
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