Top Picks 2016: Mellanox Technologies

01/12/2016 7:00 am EST


Vahan Janjigian

Editor, Bottom Line's Money Masters Stock Report

Our Top Pick for growth investors is a semiconductor company that designs high performance interconnect products based on the InfiniBand and Ethernet standards, explains Vahan Janjigian, editor of Bottom Line's Money Masters Stock Report.

Mellanox Technologies, Ltd. (MLNX) company does not manufacture these products. Instead, it contracts out manufacturing to third parties, including Taiwan Semiconductor and Flextronics. 

Interconnect products facilitate data transmission between servers, storage systems, and communications infrastructure equipment. Its products include integrated circuits, adapter cards, switch systems, cables, modules, and software.

MLNX offers end-to-end networking solutions focused on computing, storage, and communication applications for the high performance computing, Web 2.0, financial services, enterprise data center, and cloud markets.

MLNX hit a rough patch in 2013 with revenues falling 22%. The decline was largely due to a difficult comparison to 2012 when the company generated higher-than-expected sales resulting from pent-up demand caused by the launch of Intel's Romney and Sandy Bridge platforms.

Results in 2013 also suffered from high inventory levels at a major customer. 

Things improved significantly in 2014 with revenues climbing 19% thanks primarily to stronger demand for InfiniBand products for the high-performance computing market, higher sales into the storage market, and increased sales of Ethernet products into the Web 2.0 and cloud markets.

Strong growth continued into 2015 with revenues for the first nine months surging 49% year-over-year. Despite expectations for continued growth, the stock is selling for just 14 times expected 2016 earnings.

A conservative discounted cash flow analysis indicates that MLNX is significantly undervalued at the recent price. 

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