This Fabless Semiconductor is Still Expensive

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

In the stock market, investors should be aware of any large price swings. We all know that it would be very irrational for a business, which was worth $1 yesterday, to be worth maybe only 50 cents or $2 today. We should not be influenced by it. Instead, we should consider it as an opportunity and take full advantage.

What happened?

A fabless semiconductor maker, Mellanox Technologies (NASDAQ: MLNX), fell as much as nearly 18% in after trading hours today. It is currently trading at $98.15 per share at the time of writing, and the after-hours market price is $80.80. With 41.58 million shares, the after-hours market capitalization is $3.36 billion. The stock fell significantly due to the below estimate of its fourth quarter revenue guidance. It projected that the fourth-quarter revenue would be $145-$150 million, lower than the average analysts’ estimate of $157 million.

Even with the significant fall in the share price, MLNX’s shareholders have enjoyed a great year. Its share price went from $34 in October 2011 to $80.8, after-hours price, marking an incredible gain of 137.6%.

Fourth quarter revenue could be gloomy, but its third quarter revenue of $156.5 million beats the estimate of $153.07 million. In addition, Q3 profits shot up to $48.4 million or $1.09 per share, more than ten times higher than the same period last year.

Business overview

The company is a fabless semiconductor company, producing interconnect products which facilitate data transmission between servers, storage systems, and communications infrastructure equipment. MLNX revenues have been made on the basis of purchase orders, not long-term agreements. The company experienced a heavy concentration of customers. Top ten customers represented more than 70% of total sales. They don’t have an obligation by long-term agreements to purchase the company’s products.

Balance sheet and Valuation

MLNX has a strong balance sheet. As of September 2012, it has $137.9 million cash on hand, nearly $260 million short-term investments. The company is debt-free, with $591.5 million shareholders’ equity. Trailing twelve months, its EPS is $2.23. With the current after hours price of $80.8, the market values the company at 36.2x P/E and 5.68x P/B.

With this valuation, MLNX seems to be the most expensive company compared to its peers, including Broadcom (NASDAQ: BRCM), Emulex (NYSE: ELX) and QLogic (NASDAQ: QLGC). The average industry P/E is 21.98x, and the P/E of BRCM and QLGC are 25.32x and 4.68x respectively. ELX is producing losses so its P/E is not valid now. Among the four, only BRCM is paying dividends, with the yield of 1.2%. 

<img src="/media/images/user_14219/screen-shot-2012-10-18-at-23129-pm_large.png" />

For P/B valuation, during the last 5 years, the four have a quite similar pattern of P/B ratios. Since the beginning of 2012, MLNX’s has gone through the roof. And in the last 5 years, only MLNX made money for investors when it created a gain of more than 350%, whereas all other three has lost money for its investors. 

<img src="/media/images/user_14219/screen-shot-2012-10-18-at-23625-pm_large.png" />

We might feel excited for MLNX and some investors might think they want to join the rise in its stock price. But will the rise continue? Let’s look at insiders’ actions now.

Insiders' action

Since July this year, insiders have continuously exercised their options at quite low prices, in the range of $9.19-$24.19 and sold their shares in $71-$118 range. The total sale value reached more than $18.8 million in the last 3 months. I think insiders’ actions might indicate that they are not very bullish for the company at the current price.

My Foolish take

Although MLNX has enjoyed the best growth in both operating performance and its share price year-to-date, and its share price experienced a significant daily fall, but I would not touch it right now because of the following:

  • Insiders keep exercising their options at quite low prices and sell it at much higher prices.
  • Customer concentration is high.
  • High valuation compared to its peers and the industry’s average.
  • Weak fourth quarter guidance


hoangquocanh has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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