Mellanox share price up 44% since Starboard investment

Eyal Waldman

Barclays Bank analyst Joseph Wolf: We attribute the current stock performance almost squarely on the business fundamentals.

Six months ago, Barclays Bank downgraded its recommendation for Mellanox Technologies Ltd. (Nasdaq:MLNX) from "Market outperform" to "Market underweight." Six weeks later, following the beginning of the Starboard investment fund's struggle to gain control over the technology company, Barclays Bank upgraded its recommendation to "Neutral," and is now completing the turnabout by returning to its earlier "Market outperform" recommendation. Analyst Joseph Wolf is raising his target price for the Mellanox share from $72 to $90, reflected a 16.7% premium on the market price.

Mellanox, founded and managed by CEO Eyal Waldman, develops and markets high-speed data communications equipment for organizational communications using Ethernet and Infiniband technology. The company's current market cap is $4 billion, a five-year high. Mellanox is in the midst of a proxy struggle by Starboard, one of its investors, which is demanding the replacement of Mellanox's entire board of directors and alleging that the company's operating profit margin is lower than that of its competitors.

Wolf writes that he is upgrading his recommendation because Mellanox's economic fundamentals support its worth, stating, "Ahead of the publication of the first quarter reports on April 17, it appears that the company's fundamentals support the share, and that Starboard's involvement, which should still be followed, is no longer an adequate explanation of the company's current market cap."

He mentions that the share has soared 44% since November, when Starboard announced that it had become a shareholder in Mellanox, while the Nasdaq index went up only 2% during the same period. "In December we would have attributed much of the stock move to Starboard’s ownership and its potential to be a positive agent of change. Currently, with estimates now up 42% since November, we attribute the current stock performance almost squarely on the business fundamentals," he adds, noting that Starboard's holding constitutes protection against a downside in the share, "because it can be argued that all of management's measures since November are positive for the company's long-term success."

Wolf derives his $90 target price for Mellanox's share from a profit multiple of 20 for the company in 2019, compared with a 16 multiple previously. He explains that the higher multiple now is comparable to those of the comparison companies, given the improvement in Mellanox's profit margins. "In retrospect, perhaps we should have retained a "Market outperform" recommendation for the share," Wolf admits, but also says that every assessment of the Mellanox share by Barclays Bank was based on the company's economic fundamentals.

Two months ago, Mellanox upgraded its guidance for the first quarter, which is projected to end with $240-250 million in revenue, 27.2-32.5% more than in the corresponding quarter in 2017 and 1-5.2% more than in the preceding quarter. Wolf sees growth potential mainly the switches market and expects the momentum in Ethernet solutions sales to continue.

Published by Globes [online], Israel business news - www.globes-online.com - on April 12, 2018

© Copyright of Globes Publisher Itonut (1983) Ltd. 2018

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Eyal Waldman
Eyal Waldman
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