An investigation by "Globes" has found massive selling of Mellanox Technologies Ltd. (Nasdaq:MLNX; TASE:MLNX) in the market over the past few weeks by a range of investors including hedge funds, and major institutions including the largest international banks. The reason, market sources believe, is concern that the company's results for the current quarter and possibly the first quarter of 2013 will fall far short of market expectations. Regarding the current quarter, it is even considered possible that Mellanox will publish a profit warning in the coming few days.
In response the company said, "Mellanox does not respond to rumors."
In its third quarter results published on October 18, Mellanox said it expected fourth quarter revenue to be in the $145-150 million range. Investor disappointment over this revenue saw the share lose 20% of its value. But judging by the market's present behavior it looks as if even this guidance was optimistic.
The figures show that 15.5% of the company's shares currently traded are short selling - an exceptional percentage for a share traded on Wall Street, reflecting the belief that the share will continue to fall.
Data for the past month and a half shows that the number of Mellanox shares on short selling has doubled with 36% of those holding this position being institutional investors. The Tel Aviv Stock Exchange (TASE) website says that the number of Mellanox short selling shares has quadrupled in the past week.
The big question next quarter
Mellanox has undergone a number of changes over the past few months. The resignation of CFO Michael Gray bothered investors and provided additional justification for dumping the share for those who thought it was over-valued.
In addition, company's representatives have participated in several analyst days in recent months to present the new CFO Jacob Shulman. The feeling among some of the US institutions was that Shulman is conservative in presenting the coming quarterly performances, and they rushed to sell.
The most recent indications regarding Mellanox's expected results for the fourth quarter came from a report by JP Morgan following its analyst day with the company. "We feel certain in our belief of $148 million revenue in the quarter," wrote JP Morgan after hearing Shulman's guidance. JP Morgan may have felt certain but the share fell another 15%.
The big question concerns the company's performance in the first quarter of 2013. Wall Street analysts see revenue of $140-150 million, up 60-70% from the first quarter of 2012, and similar to the revenue the company is expected to report in the final quarter of 2012.
Even if Mellanox disappoints this quarter, then the market will be forgiving if next quarter meets or exceeds predictions. However, if the company disappoints both this quarter and in the first quarter of 2013, something which has never happened before, then investors will act aggressively.
Concluding a successful year
So far Mellanox has had a very successful year. Along with its results for the first quarter, the company reported that second quarter revenue would double compared with the corresponding quarter of 2011, thanks to deals involving Intel's new Romley processing platform for organizational servers.
The same story recurred with the second quarter results with Mellanox predicting more than 100% growth for the third quarter compared with the corresponding quarter of 2011, with the company sending the message that revenue had reached new levels and this was not a one-off situation.
The practical reason for the huge jump in the company's performance was that Mellanox was benefitting from a wave of upgrades of their computer equipment by large organizations and the growing presence of infrastructure equipment as part of the major changes in the organizational computer world (technological developments such as cliud computing, data centers running large Internet companies, analyzing big data in real time, and more). All these capabilities required swift communications, minimum delays in access to data, and smart management of organizational networks - things that Mellanox provides with its Infiniband connectivity.
The forecast for the coming years is that Mellanox will break through the $1 billion a year sales threshold with faster than expected growth in the market in which it operates. On the other hand, investors have been concerned recently by the anticipated competition from Intel which expects to become a direct rival in 2014-2015.
Published by Globes [online], Israel business news - www.globes-online.com - on December 20, 2012
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