EZchip Semiconductor Ltd. (Nasdaq: EZCH; TASE:EZCH) is one of the most promising high-tech companies to emerge in Israel in the past decade, and about which we will hear much more in the coming decade.
Yet to read headlines in our papers after the company published its financial report for the second quarter and lowered its guidance, it is possible to imagine that the company's end was near. "EZ come EZ go" was one headline, after the company's share price fell 25% following the results and lower guidance.
"The 25% fall reminds us just how risky blind faith in technology stocks is," said the paper to thinking readers. "Blind faith in technology stocks" is an archaic phrase from 12 years ago. Since then blue-chip stocks, such as Lehman Brothers, Citigroup Inc. (NYSE: C) and American Insurance Group Inc. (NYSE: AIG) have fallen by up to 99%, not to mention real estate companies, which are easy to understand and physically feel their assets, such as Africa-Israel Investments Ltd. (TASE:AFIL) and Delek Real Estate Ltd. (TASE: DLKR).
No need to get excited about lower guidance
In contrast to Mellanox Technologies Ltd. (Nasdaq:MLNX; TASE:MLNX), which I will presently return to, EZchip is very easy to understand, and there is no need for blind faith. I can place a reasonable bet that the abovementioned writer used EZchip processors for his content to reach targets throughout the Internet, because they are the brains that drive routers made by Cisco Systems Inc. (Nasdaq: CSCO), Juniper Networks Inc. (Nasdaq: JNPR) and other companies, just like Intel Corporation's (Nasdaq: INTC) processors run the content on PCs and laptops.
Fortunately there is George Gilder, the American Christian technological guru that visits here every six months and reminds us how we are the champions and deserving of a gold medal when it comes to public and private technology companies. Gilder was in no way perturbed by the sharp lowering of EZchip's guidance. After all not a single customer has left and no real competition is on the horizon, while Cisco, its largest customer and industry leader is broadening its cooperation with company to more platforms.
Furthermore, a share price of $29 is not something to disturb Gilder's open-eyed faith in EZchip. Among other things, he bought shares for the fund he manages at $8 each at the height of missile attacks on Yokne'am in the Second Lebanon War. True EZchip's multiples are relatively high for the company's performance but the wise men of Wall Street have taught me that the market only looks ahead. And what the market sees is a company with $154 million net cash in its coffers, operating profits of 82%, and with processors that move most of the Internet's network routers a network flooded every second by heavier video content. Except for the occasional air pocket here and there, telecom providers have to increase their investment in the LTE era that is only just beginning with the launch of the new iPhone next month by Apple.
The Mellanox lesson
Next month, with an official announcement, the market will factor into the long-term multiples of EZchip, the new sector that it is entering with the processors it has developed in Kiryat Gat. What we know is that these processors are for a market that EZchip has not yet entered, and the superlatives I have heard about their new chip range from "major impact" to "game changer." We already know that there are satisfied customers but the first sales are not expected for another three years.
Finally, a word about EZchip's prosperous neighbor in Yokne'am Mellanox. In one week in the middle of July 2010, Mellanox's share plunged 38% to $15.5 following a slight lowering of guidance. I don't recall what they wrote then in that rival financial newspaper, but if anybody sold or get fed up with their "blind faith" in technology stocks missed that share's three-digit run within two years.
For me technology today is as basic as electricity and telephones were 30 years ago. It is surely time to brush away the stigma of technology shares from the dot.com bubble period.
Published by Globes [online], Israel business news - www.globes-online.com - on August 13, 2012
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