Cloud Computing Lifts Mellanox As Networks Need Speed

Chip designer Mellanox Technologies is banking on newly unveiled innovations to quell doubts and extend its recent flurry of robust earnings deep into 2016.

The Israel-based company, a designer of chips used in servers and data storage systems, has generated strong earnings growth in recent quarters, in part on generational upgrades to high-performance data center computers that are equipped with Intel processors.

When industry giant Intel (NASDAQ:INTC) rolls out a new rendition of its Xeon chips, as it did in the second half of 2014 with its so-called “Grantley” performance boost, technology companies tend to invest in the upgrade. When they do this, they often also invest in new auxiliary products such as those created by Mellanox (NASDAQ:MLNX).

In April, Mellanox posted first-quarter earnings per share of 60 cents ex items, a whopping 445% jump from a year earlier, on a 48% surge in revenue to $ 146.7 million. That followed strong gains in the two previous quarters.

For the second quarter, analysts polled by Thomson Reuters expect Mellanox revenue to grow 54% and EPS to rise more than 300%.

Moving The Data

The high-speed switches and adapters developed by Mellanox bolster the efficiency of the myriad computer networks that compose the rapidly growing Internet cloud.

Mellanox is the seventh highest-ranked company in IBD’s Electronic-Semiconductor Fabless industry group, with a Composite Rating of 96. Avago Technologies (NASDAQ:AVGO), NXP Semiconductors (NASDAQ:NXPI) and Ambarella (NASDAQ:AMBA) share the top spot — each having a best-possible 99.

Ladenburg Thalmann analyst Daniel Amir told IBD that Mellanox’s recent results “were clearly very good,” and he said the Grantley upgrade cycle is likely to benefit the company for the rest of this year.

But that cycle will start to wind down by 2016, he said, and Mellanox will need substantial new income drivers to sustain its momentum into next year. Uncertainty on that front ignited doubts among some analysts and investors earlier this year, he said, when in January and February the stock struggled at various points. Mellanox stock is up 14% this year.

Fortunately, Amir said, Mellanox recently laid groundwork for likely growth in coming quarters. Specifically, in June it announced new ethernet products that analysts anticipate will bolster sales by next year.

It introduced what it bills as the world’s first nonblocking 100-gigabit ethernet switch, for especially high throughput and scalability. Analysts anticipate that it will start shipping in the third quarter.

Piper Jaffray analyst Andrew Nowinski said in a June report that the new switch, called “Spectrum,” is “well ahead of competitive offerings” such as Broadcom‘s (NASDAQ:BRCM) “Tomahawk.” He looks for “a material contribution to revenue” from Spectrum in 2016.

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