A lot of things are starting to go right for Mellanox (MLNX).
Not only is Mellanox well-placed to benefit from the growth of
high-performance computing demand in general, it is taking share from
rivals like Broadcom (AVGO) and Intel (INTC)
as customers upgrade beyond 10G Ethernet and now stands to benefit from
both reacceleration in enterprise storage demand, but also the
commercial ramp of its Bluefield chip. Add in the fact that management
has committed itself to significant operating margin improvements over
the next couple of years, and I think Mellanox is a rare mix of
expanding markets, growing share within those markets, and improving
margin leverage.
Although Mellanox does not look all
that cheap on an adjusted DCF basis, growth tech stocks rarely do.
What's more, operating margin is typically a powerful driver/determinant
of multiples for companies like Mellanox, and progress toward a high
20%s operating margin could put a $100-plus fair value on the table by
this time next year.
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