Mellanox Pushed Toward Higher Margins, But Ample Uncertainties Remain

Although I've generally been bullish on Mellanox (MLNX) over the last five years, this semiconductor company (and stock) has had its issues, including an apparent unwillingness (or inability) to communicate clearly with investors regarding strategy decisions and priorities. On top of that, the company's R&D-heavy business plan has kept a lid on margin expansion - one of the prime value drivers for semiconductor stocks, and particularly, now as the world seems to think that Broadcom's (AVGO) margin-driven strategy is better than the revenue growth-driven strategies of yesteryear in semiconductors.

While management seems to regard the involvement of Starboard (a noted activist investor) as an unwelcome distraction, the reality is that Starboard is not wrong in taking management to task for the underwhelming stock performance - over the past five years, you would have done far better with Broadcom, Cavium (CAVM), Marvell (MRVL), or even Intel (INTC) than Mellanox. With management paying more attention to margins, the shares actually look a little undervalued now and potentially more significantly so as an M&A play.

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Mellanox Pushed Toward Higher Margins, But Ample Uncertainties Remain