Sunday, July 22, 2018

Mellanox Looking Like A Multiheaded Growth Monster

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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