EZchip Gains as Investors Resist Bears: Israel Overnight

EZchip Semiconductor Ltd. (EZCH) rose the most in four months in Tel Aviv as analysts discounted Kerrisdale Capital Management LLC’s outlook that the Israeli chipmaker will be forced out of the market by 2018.

Shares of the Yokneam, Israel-based company advanced 5.1 percent, the most since Nov. 8, to 88.27 shekels, or the equivalent of $23.99 at the close in Tel Aviv. The U.S. shares fell 1.9 percent to $23.85 at 10:38 a.m. today in New York. The shares led declines on the Bloomberg Israel-US Equity Index. (ISRA25BN)

Kerrisdale Capital Management LLC, a New York-based hedge fund with $180 million in assets, said yesterday it was betting on further declines of EZchip as competition heightens, spurring an early slide of as much as 8.4 percent to the lowest level since August 2010. Shares erased declines as Feltl & Co. said it would take at least three more years for rivals such as Broadcom Corp. (BRCM) to take market share. Switching costs will also prevent customer loss, Clal Finance Batucha Brokerage Ltd. said.

“He’s misunderstanding the competition,” Dov Rozenberg, a Tel Aviv-based analyst with Clal, said by phone yesterday, referring to Kerrisdale Capital. “EZchip’s customers are a lot more secure considering their products are a lot more advanced, which promises a revenue stream for the next few years.”

The New York traded shares yesterday advanced 2.2 percent to $24.31, trimming this year’s retreat to 26 percent.

Lowest Valuation

“We stand by the long-term risks laid out in our report,” Sahm Adrangi, Kerrisdale’s founder and fund manager, wrote in an e-mail yesterday, responding to a comment request on Feltl’s note by Bloomberg News. “The network processing unit market is not large enough.”

Broadcom announced in September 2011 that it would acquire Netlogic Microsystems Inc. for $3.7 billion to benefit from surging demand for networking equipment. Its purchase was completed in February 2012, according to a company filing. Marvell Technology Group Ltd. (MRVL) bought Xelerated, which provides network processing, in January 2012. These rivals will continue to attack EZchip’s business, and at the very least, add pricing pressure to the market, Adrangi said in the note.

EZchip retreated 25 percent through yesterday since Chief Executive Officer Eli Fruchter told analysts on a Feb. 13 conference call that one of its customers, Shenzhen, China-based Huawei Technologies Co., is developing its own processor, reducing the need for the Israeli company’s technology.

Annual Decline

The company’s 2012 revenue fell 14 percent to $54.7 million, its first annual decline in at least 10 years. Sales will probably reach $160 million by 2016, down from about $250 million previously expected, according to EZchip’s Feb. 13 earnings call and data compiled by Bloomberg.

An EZchip spokesman declined to be identified and said the company could not comment on investor or analyst posts in an e- mail yesterday. Marvell Spokesman Daniel Yoo said by e-mail that his company had no comment. Broadcom did not reply to e-mails and phone calls seeking comment.

Competitive threats posed by Broadcom are unlikely to impact EZchip until 2016 at the earliest, Feltl wrote in yesterday’s e-mailed note. Large customers, such as Cisco Systems Inc. and ZTE Corp. (000063), have already committed to EZchip’s products, making switching costs high in the near term, he said.

“The customers have already selected EZchip to use in their products,” Jeffrey Schreiner, a Minneapolis-based analyst at Feltl, who has a buy rating on the shares, said in a telephone interview yesterday. “Given the growth opportunity within EZchip and new market opportunities, EZchip is actually discounted.”

EZchip plunged last week to trade at 19 times estimated earnings, the lowest valuation since December 2011.

To contact the reporter on this story: Leslie Picker in New York at lpicker2@bloomberg.net

To contact the editor responsible for this story: Emma O’Brien at eobrien6@bloomberg.net

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