Why Analysts Are Abandoning Mellanox

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When Mellanox Technologies Ltd. (NASDAQ: MLNX) released its first-quarter financial numbers after the markets closed on Wednesday, investors and analysts alike were unhappy with the results. Consequently shares were sent into the fire on Thursday, and a few analysts are abandoning the stock.

24/7 Wall St. has included some highlights from the earnings report, as well as what a few key analysts are saying about why it might be a good idea to get out of the stock.

The company posted a net loss of $0.29 per share and $188.7 million in revenue. The consensus estimates had called for $0.49 in earnings per share (EPS) and revenue of $205.0 million. In the same period of last year, the fabless semiconductor maker posted EPS of $0.81 and $196.8 million in revenue.

Looking ahead, the company expects to see quarterly revenues between $205 million and $215 million, with a gross margin of 70.5% to 71.5% in the second quarter. The consensus estimates are $0.67 in EPS and $222.99 in revenue for the second quarter

Credit Suisse took a look at the report and downgraded the stock to a Neutral rating from Outperform. The firm’s John Pitzer said in the report:

While the Company is well levered to our Data Growth Paradigm, execution has been lackluster, with the stock up ~25% YTD ahead of the SOX up 11%. MLNX reported C1Q Rev/EPS BELOW CS/Street on HPC InfiniBand pushouts – only the second time in 10 years MLNX missed guidance. The Company guided C2Q Rev/EPS BELOW CS/Street on similar q/q growth albeit off a much lower than anticipated C1Q Rev.

The report continued:

The stock is trading at 28 times EV/FCF w/SBC vs. high-growth peers of 28 and the Semi median of 19, cheap if growth reaccelerates but expensive if it does not; and while $2.03 cash/sh is nice, the lack of buyback/dividend greatly devalues a cash rich balance sheet. A premium multiple needs to be supported by premium growth which has not happened. Conversely the strategic value of the asset provides downside support as M&A is a potential and a risk to being too negative.

A few other analysts weighed in on the stock as well:

  • Jefferies has an Underperform rating and cut its price target of $38 from $41.
  • Piper Jaffray downgraded it to Neutral from Overweight.
  • D.A. Davidson cut its price target to $55 from $62.

Shares of Mellanox were last seen down 11% at $45.33 on Thursday, with a consensus analyst price target of $52.80 and a 52-week trading range of $38.75 to $52.80.