|Ox, re: Benchmark- more detail.....................................|
Benchmark initiates coverage on Mellanox Technologies (NASDAQ: MLNX) with a Buy rating and a price target of $60.00.
The analyst expects a return to top-line growth to be motivated by ramping 25Gbps Ethernet NIC and switch sales as well as normalization in the storage market following the consolidation events in 2016 and product refreshes. The analyst also expects that fresh server processor product cycles from Intel and AMD will help boost growth along with Infiniband share gains driven by MLNX's 200 Gbps HDR.
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Mellanox Can Ride the Rise of Flash Memory, Says Benchmark
Mellanox has a number of factors to recommend its shares as it returns to growth next year, writes Benchmark's Gary Mobley, including its newer chips to create a "fabric" for interconnecting flash-based storage in data centers.
By Tiernan Ray
Aug. 29, 2017 12:43 p.m. ET
Shares of high-speed interconnect technology provider Mellanox Technologies ( MLNX) are up $1.65, or almost 4%, at $46.85, in an otherwise down market, after The Benchmark Company’s Gary Mobley today started coverage of the stock with a Buy rating, and a $60 price target, writing that growth is coming back into its business from a number of factors, including especially the rise of non-volatile memory, such as flash, in data centers.
Mobley starts his thesis by citing all the negatives against the stock, given that it has trailed the Philadelphia Semiconductor Index ( SOX) in the last five years:
The shares have underperformed the SOX benchmark on a five-, three- and one-year basis. Most of the underperformance occurred during the past year when the Company witnessed lower-than-expected Infiniband sales as a result of server/storage OEM consolidation (HPE+SGI; Dell-EMC), delayed product launches from HPE and general sluggishness in the storage systems market. On the Ethernet side of Mellanox’s business, customer transitions from 40Gbps to 25Gbps solutions created a pocket of weakness. The “bears” will likely argue that Mellanox will have a difficult time growing revenue against a backdrop of slowing data center cap ex and a maturing external storage market. Additionally, they’ll likely argue that a sales mix shift toward NIC and switch systems will drive down gross margin, ignoring the fact this shift creates multiples more in average deal size and related gross profit.
But, writes Mobley, chip speed increases in new server chips from Intel ( INTC) and Advanced Micro Devices ( AMD), "will always drive a treadmill of innovation for Mellanox,” especially as those chips have to increasingly connect to faster and faster storage and main memory systems.
Mobley identifies the company’s competitive advantage in the move away from traditional “fibre channel” networking to connect to storage, and toward ethernet and other technologies:
This shift toward cloud compute, combined with growth in flash-based storage, machine learning, object storage, etc. is driving a migration away from plain-vanilla Fibre-Channel and a movement toward mainstream Ethernet, Infiniband, and soon NVMe over fabric, with the latter three key markets and technologies being focus areas for Mellanox.
He spends quite a bit of time explaining the company’s newer “BlueField” chips, which connect arrays of flash-based drives:
At the recent Flash Memory Summit, Mellanox shared details regarding its BlueField SoC, related reference designs and ecosystem partners. The launch of BlueField is significant for Mellanox as the SoC specifically addresses the emerging NVMe-over-fabric market and complements existing Infiniband-and Ethernet-based technologies. BlueField also represents the first example of integration of the EZchip/Tilera packet inspection and multi-core (ARMv8.0) processor technology. Mellanox acquired EZchip in 2016. Mellanox has integrated the hardware needed to frontend an NVMe over-fabrics flash array into a single SoC, making it easier for shared flash storage system builders to put together NVMe JBOFs (a bunch of flash drives) – NVMe SSDs in this case.
As far as estimates, Mobley is basically matching the Street for this year and next. He estimates $866.6 million in revenue this year and $2.14 per share in non-GAAP net income, compared to consensus for $867.7 million and $2.14. For 2018, he sees revenue of $976 million and EPS of $2.84, against consensus for $977.9 million and $2.85 per share.