Mellanox: Can It Pull Off Another Big Beat In Q3?

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Can Israeli-based tech companyMellanox Technologies ( MLNX ) pull off another big beat in revenue and earnings and jolt shares higher for the third quarter in a row?

Investors will get an answer Wednesday, when the maker of high-performance interconnects for quickly transferring and storing data reports third-quarter results.

Mellanox crushed Wall Street views in the first and second quarters on exploding demand for its products, sending shares soaring more than 50% and 40%, respectively.

Demand is being fueled by growth in data with the rise of new Internet uses in the age of social media, e-commerce and other online verticals, and all the data and cloud computing they entail.

Mellanox can move data as fast as 56 gigabits a second with its core interconnect products, based on an industry standard it helped develop, known as InfiniBand.

The leading and fastest InfiniBand vendor's products include silicon, adapter cards, switch systems, cables and software.

Analysts say business fundamentals are still strong and expect another good quarter.

"The story remains intact," said ThinkEquity analyst Rajesh Ghai, who says the firm is seeing new demand from companies involved in storage and Web 2.0 markets.

Upside Surprise

But since analysts have raised estimates to reflect Mellanox's outsize performance, the likelihood of a big upside surprise is less likely this time.

"High expectations are already baked into analysts' estimates, so it reduces the potential for a massive surprise," said Wunderlich Securities analyst Brian Freed.

"It's still a rockin' business," he added.

But the raised bar puts more pressure on Mellanox to deliver -- or overdeliver.

"They have to meet or exceed consensus estimates or the stock is going to get crushed," Freed said.

Analysts estimate Q3 profit will jump 265% over the year prior to $1.13 a share, roughly the same percentage gain as in Q2, when analysts were caught off guard and missed by a big margin, as they did in Q1, when earnings rose 113%.

Quarter-to-quarter sequentially, revenue moved up 22% in Q1 and 50% in Q2. On a year-over-year basis, revenue jumped more than 61% in Q1 and almost 111% in Q2.

For Q3, analysts now estimate that revenue will rise 125% over the earlier year to $153 million. They see 105% growth for the full year, to $532 million.

"It's hard to keep putting up blockbuster quarters," said Ghai. "The Street is expecting some upside. Will it be blockbuster along the lines of the last couple of quarters? I doubt it."

While the bar has been raised due to its spectacular results of late, Mellanox is still enjoying strong new demand for its core InfiniBand products, watchers say.

"Storage will be the next big catalyst for Mellanox," Ghai said.

He suspects Mellanox will land new business with current enterprise storage customerEMC ( EMC ) should EMC adopt new InfiniBand technology in the future, as he suspects it will based on his talks with people at EMC.

Other new growth in the storage market could come from current customerIBM ( IBM ) as it ramps up its new IBM-XIV storage-system line, which uses InfiniBand technology from Mellanox, Ghai says.

Meanwhile,Intel 's ( INTC ) new, high-speed Romley processor has been one of the reasons for some of Mellanox's revenue upside lately, says analyst Kevin Cassidy of Stifel Nicolaus.

"Companies that want higher-speed servers use Romley," he said. "You need faster networks if you've got these faster servers."

Enter InfiniBand, just such a high-speed network. And Mellanox offers "the highest speed right now at 56 gigabits a second," he says.

"If you just bought a Ferrari, you need an autobahn to drive it on," he said as a kind of comparison.

Romley users include such companies asAmazon ( AMZN ) andFacebook (FB), Cassidy says.

Mellanox doesn't typically sell directly to Amazon and other Web 2.0 companies, he says. Rather, he says, it sells to customersHewlett-Packard (HPQ),Dell (DELL), IBM and EMC, among others, who, in turn, sell to Web 2.0 concerns such as Amazon, Facebook,Apple (AAPL),Google (GOOG) and others.

Intel also is involved in InfiniBand technology through its acquisition ofQLogic 's (QLGC) assets. But the technology is considered a generation behind Mellanox's.

In June, Intel chose an InfiniBand adapter silicon from Mellanox to deploy in new servers. That speaks to the superiority of Mellanox's products, some analysts say.

Full Valuation

Still, Cassidy moved to the "sidelines" on Mellanox in early September, when he downgraded shares to "hold" based on what he viewed as its full valuation and "a more gradual revenue increase" compared with Q1 and Q2.

He thinks revenue growth will slow to 27% next year, after growing 100% this year.

He conceded in his note then that the downgrade may be "premature" considering "the somewhat secretive nature of Web 2.0 companies' cloud deployments."

He also pointed out that Mellanox may need to step up spending as it moves toward 100-gigabit-per-second networks and continues to broaden its markets.

In a phone call Thursday, he said he expects Mellanox to reach 100 gigabits per second by the end of 2013 or early 2014. He doesn't expect Intel to reach that goal until sometime in 2015.

"It's still outgrowing anything in high tech right now," he said of Mellanox. "PC growth this year will be negative."



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: AMZN , EMC , IBM , INTC , MLNX

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