Intel threat ignored as Mellanox CEO dodges stock rout

Gabrielle Coppola, Bloomberg
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In a battle for market share with the world’s largest chipmaker, a little trash talking can go a long way.

That’s what Eyal Waldman, chief executive officer of Mellanox Technologies Ltd., tried when he brushed off Intel Corp.’s rival hardware on an analyst call last week, accusing the company of scaling back expectations for the speed of its product. Intel is “lowering the estimated performance by more than 30 percent from their previous public statements,” Waldman said.

The remarks, which Intel disputes, and a slew of buy ratings that followed Mellanox’s completion of its acquisitionof EZchip Semiconductor Ltd., helped drive shares to the highest since June last week. The Yokneam Elit, Israel-based company is up 20 percent this year, compared with Intel’s 14 percent drop and the Philadelphia Stock Exchange Semiconductor Index’s 5.9 percent slide.

Mellanox,whose InfiniBand hardware is ubiquitous in high-performance computing networks, is trying to jump ahead of competitors by selling data-center switches that can move information at the fastest speed in the industry.Big Behemoth’ While Waldman is seeking to expand into data centers owned by companies such as Amazon Inc. and Facebook Inc., Intel is encroaching on his home turf with its Omni-Path interconnectfor supercomputers, which it says will be faster and handle more servers at once.

Intel bought technology to connect server chips from Cray Inc. in 2012 for $140 million, and spent $125 million on high-performance computer network infrastructure from QLogic earlier that year. Mellanox shares took a hit earlier this month after Jefferies Group LLC said Intel’s new product posed a “significant risk” to Mellanox’s supercomputer business.

“Everybody loves Intel, the big behemoth usually destroys anybody who comes in their way,” said Srini Nandury, an analyst at Summit Research Partners in Summit, New Jersey, who rates the shares a buy. “This is a different game completely. You can’t buy stuff. You have to put in the time to develop it. That’s why Mellanox has the advantage.”

Waldman seems to have succeeded in downplaying the threat. JPMorgan Chase & Co. assigned a buy rating to Mellanox last week, and Barclays Plc reinstated its buy rating.Diversified Revenue “We’re not too concerned about the near/mid-term competitive threat from Intel’s Omni-Path technology,” JPMorgan analyst Harlan Sur wrote in a Feb. 25 research note. “We think there is a chance that Omni-Path generation 2 potentially gains more traction, but believe Mellanox will have a fairly diversified revenue stream at that time.”

Supercomputers make up 35 to 40 percent of Mellanox’s revenue following its acquisition of EZchip, whose processors will allow it to design intelligent features for data centers into its chips, like security, storage processing, and video, JPMorgan said.

Mellanox sales are forecast to grow 31 percent this year to $859 million, following a 42 percent expansion last year, data compiled by Bloomberg show.

“We have seen changes in Intel’s projections regarding the performance characteristics,” Waldman told analysts on a Feb. 23 call. “We believe that when performance measurements at an application level become available, the advantages of InfiniBand will become clear.”False Assertion Intel denied that it has reduced its speed projections. “His assertion that we are lowering our performance claims is blatantly false,” Mark Miller, a spokesman for Intel, said in response to Waldman’s comments. “The performance of our Omni-Path technology hasn’t changed and customer interest is only increasing.”

The technology Mellanox uses seeks to overcome data processing limitations in “CPU-centric approaches like Omni-Path,” Gilad Shainer, vice president of marketing at Mellanox, wrote in an e-mail.

Santa Clara, California-based Intel began selling Omni-Path in small quantities in the fourth quarter of last year, and plans to begin selling to the broader market in the first three months of 2016, Miller said.

Intel is marketing its switches as better than Mellanox’s products because they reduce the time it takes data to get from a server to the network and communicate with more computers at once,said Kevin Cassidy, an analyst with Stifel Nicolaus & Co. in Washington. It’s been late in shipping the switches to the broader market, he said.

“They’re trying to redefine it so they don’t have to go head to head against Mellanox,” Cassidy said.

While Mellanox’s execution on its new switches has won over analysts, some investors are still reluctant because they got burned in 2012, when sales tied to a server upgrade rocketed on pent-up demand and then quickly petered out.

“People are a little worried about it, they have some emotional scars,” said Nandury atSummit Research, who remains bullish. “There’s plenty of money to be made in the stock.”

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