Mellanox share price reaches new peak despite coronavirus

Eyal Waldman Photo: Tamar Matsafi
Eyal Waldman Photo: Tamar Matsafi

Despite having major operations in China, the company says it is unaffected by the coronavirus epidemic.

The strong results published by Israeli big data chip connectivity company Mellanox Technologies Ltd. (Nasdaq:MLNX) last week sent its share price above $120 for the first time, an all-time record. After slipping back slightly on Friday, the share price closed at just under $121, only 3.3% short of the $125 share price set in the deal for Nvidia's acquisition of the company. The acquisition is still being delayed.

Commenting today on the effect of the coronavirus on the company's activity and the wait for approval of acquisition by the Chinese regulator, Mellanox said, "Mellanox's offices in China are spread around the cities of Beijing, Shenzhen, Guangzhou, and Shanghai. The company's operations include R&D, sales, marketing, and production lines. Mellanox has over 120 employees in China, three of whom are Israelis. Two of the Israelis have returned to Israel, while one remained in China at his request. In addition, flights of Israeli employees to China and of Chinese employees to Israel have been canceled. The company has given masks to all of the Chinese employees, and is following the government's instructions and acting in accordance with them. At this stage, the situation is having no effect on the company's business activities. Regarding the deal with Nvidia, we are waiting for approval from the Chinese regulator."

Mellanox develops and markets communications equipment for high-speed data transmission. The deal with Nvidia was first reported last March, and slated to be closed by the end of 2019. Delays in obtaining the required regulatory approval in China, however, are preventing the two companies from completing the deal. The fact that Mellanox's share price is nearing the price in the deal might signal that investors believe that approval will be given soon (perhaps after the Chinese New Year celebrations, which were affected this year by the outbreak of the coronavirus). Another possibility is that investors believe that even cancelation of the deal will not be a disaster for Mellanox, which can also continue growing as an independent company, especially after its good financial results in 2019.

In any case, Mellanox is still waiting for the deal to be completed. The agreement between the companies states that the deal can be called off if it is not completed by December 10, 2019, but subject to two three-month extensions of the period for the purpose of obtaining the required regulatory approval. In other words, at this stage, the delay does not constitute grounds for canceling the deal. The sale of Orbotech to KLA-Tencor was also delayed for two months by waiting for Chinese regulatory approval, with the trade war between China and the US in the background, but was eventually completed a year ago, 11 months after the signing of the agreement was reported.

In its financial statements for 2019, Mellanox substantially outperformed the analysts' forecasts. Part of the surprise can be attributed to the fact that Mellaox stopped publishing guidance and conducting conference calls with analysts since it announced the deal with Nvidia.

Mellanox's fourth quarter revenue totaled $380 million, 30.9% more than in the fourth quarter of 2018, while the analysts predicted only $336 million. Net profit per share was $2.31, $0.61 more than the analysts' forecasts. Mellanox's revenue for 2019 as a whole climbed 22.2% to $1.3 billion, while non-GAAP net profit totaled $393 million for the year, $7.13 per share.

Another impressive figure in the reports was the company's cash. Mellanox had $876 million in cash and short-term investments at the end of 2019, compared with $438 million before the acquisition by Nvidia was known. Mellanox generated $425 million in cash flow from current activity during 2019. Nvidia is due to pay $7.36 billion for the acquisition of Mellanox (including blocked shares, options, and stock-based compensation for employees) - $6.5 billion when the company's cash is taken into account, compared with $6.9 billion, excluding cash, when the acquisition first became known.

Published by Globes, Israel business news - en.globes.co.il - on February 2, 2020

© Copyright of Globes Publisher Itonut (1983) Ltd. 2020

Eyal Waldman Photo: Tamar Matsafi
Eyal Waldman Photo: Tamar Matsafi
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