EZchip a Buy to MKM at Double Nasdaq Valuation: Israel Overnight

EZchip Semiconductor Ltd., the Israeli chipmaker that jumped to a record in New York yesterday to trade double the valuation of the average Nasdaq company, still has room to rally, according to MKM Partners LLC.

The Yokneam, Israel-based company, whose biggest customers include Juniper Networks Inc. and Cisco Systems Inc., advanced 4.3 percent to an all-time high of $42.25 yesterday, pushing the share price to 32.3 times estimated earnings, more than double the 15.8 average for companies on the Nasdaq Composite Index, data compiled by Bloomberg show. The Bloomberg Israel-US 25 Index of the largest Israeli companies listed in the U.S. climbed 1.1 percent to 84.77, the biggest advance in a month.

Shares of EZchip may gain another 16 percent in the next twelve months as rising Internet traffic drives up demand for the company’s semiconductors, which are used to manage traffic on the Internet, Daniel Berenbaum, an executive director at MKM in Stamford, Connecticut, wrote in a client note e-mailed yesterday. EZchip has surged 49 percent this year as demand for its processors gained on rising use of smartphones and tablets.

MKM boosted its target price for EZchip to $49 “as we gain increased conviction in the potential to quadruple revenue by 2015” Berenbaum said, according to the note. “We recommend that investors continue to add to positions at current levels.”

EZchip stock has climbed 23 percent from the close on July 25, the day before Berenbaum initiated his recommendation to buy the shares, data compiled by Bloomberg show.

Outperforming Nasdaq

The stock’s 2012 surge has outperformed the Nasdaq’s 14 percent advance. The company’s U.S. shares cost $1.22 more than shares traded in Israel, the biggest premium among dually traded stocks. Israeli markets were closed yesterday for a holiday.

Radware Ltd., a Tel Aviv-based company that develops security software and cloud-computing technology, advanced 2.8 percent to $34.65 in New York yesterday, an eight-month high.

Cellcom Israel Ltd., the country’s largest mobile-phone company, gained for the first time in 10 days, rallying 2.6 percent to $12.62 after reaching an all-time low on March 7. The advance narrowed the company’s discount to Tel Aviv stock to 12 cents.

The Nasdaq climbed 1.2 percent yesterday as Germany’s industrial output increased more than forecast and Greece neared completion of a deal to swap debt in the biggest sovereign restructuring in history.

Israel, whose population of 7.8 million is similar in size to Switzerland’s, has about 60 companies traded on the Nasdaq, the most of any country outside the U.S. after China. The nation is also home to more startup companies per capita than the U.S.

Mobile Devices

Demand for EZchip’s processors, which help companies handle network traffic more quickly, has increased this year as a growing number of consumers use Apple Inc.’s iPad and other mobile devices to surf the Web, play games and download music and videos. The move toward storing more data on the Internet, using services such as Apple’s iCloud, is also boosting net traffic, said Gary Mobley, an analyst at The Benchmark Company.

“It’s growth in data traffic that really drives demand for edge routers” which use EZchip’s processors, Mobley said by phone from St. Louis. “Your iPad should go everywhere with you and your iPhone certainly does. If you want access to all your media, all your music, photos, videos and what-not, you’ve got to have some central way to store the info, and what better way to do that than within the cloud.”

‘Flat’ Sales

Data usage by mobile devices will increase 18-fold by 2016 to 10.8 exabytes per month, or the equivalent of streaming 33 billion DVDs annually, as the number of smartphones, tablets and other portable devices exceeds the world’s population and Internet connection speeds increase, according to a forecast from Cisco.

EZchip’s revenue will rise to $72 million this year, according to the average of eight analysts’ estimates compiled by Bloomberg, compared with $63 million in 2011. The company reported a fourth-quarter net loss of $5.95 million on Feb. 8, after repaying $9.9 million to the Israeli Office of the Chief Scientist, a government unit that support local companies’ research and development.

EZchip said sales will be “flat to slightly down” in the current quarter, when it reported earnings on Feb. 8.

The stock may be headed lower, Jay Srivatsa -- an analyst at Chardan Capital Markets LLC, which rates EZchip’s U.S.-listed shares neutral, a view that is neither bearish or bullish -- said by phone from New York yesterday. Spending by EZchip’s largest clients, Juniper and Cisco, has “been very cautious,” Srivatsa said.

‘Struggling’ Customers

“Some of their end customers are still struggling” in terms of capital spending, Srivatsa said. “I would advise investors to take some profit, not to be chasing it at these levels.”

EZchip’s climb has been fueled by speculation that the company may be a takeover target after two chipmakers were acquired this year, Srivatsa said. Broadcom Corp. acquired Netlogic Microsystems Inc. last month and Marvell Technology Group Ltd. bought Xelerated AB, a Swedish processor maker, in January. Chief Executive Officer Eli Fruchter declined to comment on a possible buyout when contacted in February.

Investors should look at growth beyond this year to evaluate EZchip’s share price, said MKM’s Berenbaum, who estimates $174.5 million in sales in 2014 and $256.2 million in 2015, according to the note.

“The cardinal error of a growth investor is to sell a stock on valuation,” he said by phone from New York yesterday. “The reason that investors own the stock or want to buy the stock is not because of the next twelve months’ earnings. It’s not even probably because of 2013 earnings. It’s because of what they see as the growth path for 2014 to 2015.”

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