Mellanox, HPE Partnership to Boost InfiniBand Adoption
Mellanox Technologies Ltd MLNX recently announced a strategic collaboration with Hewlett Packard Enterprise HPE, under which the latter’s HPE SGI 8600 and HPE Apollo 6000 Gen10 systems will be integrated with Mellanox’s ConnectX-5 InfiniBand adapters and Switch-IB2 InfiniBand switches.
The integrated products will support Gen-Z open standard consortium, of which Hewlett Packard is one of the founders and Mellanox is a member. Gen-Z architecture aims at reducing load on CPU, by using the Gen-Z high performance, low latency, memory-semantic fabric that can be used to communicate to every device in the system. Gen-Z is focused on delivering high efficiency, high bandwidth and low-latency at lower cost.
We believe that the strategic collaboration is significantly positive for Mellanox as it will boost InfiniBand sales volume. Notably, the product line represents more than 50% of its top-line. However, revenues declined 14.3% from the year-ago quarter, primarily due to lack of large High Performance Computing (HPC) deals in first-quarter 2017.
Mellanox Technologies, Ltd. Revenue (TTM)
Mellanox Technologies, Ltd. Revenue (TTM) | Mellanox Technologies, Ltd. Quote
This has also hurt share price movement on a year-to-date basis. Mellanox has returned 6.4% as compared with the Zacks Electronics Semiconductors industry’s gain of 20.9%.
Positive Views on InfiniBand
Mellanox expects InfiniBand product line to start growing sequentially from second-quarter 2017, driven by multiple large deals in the current and upcoming quarter. The company expects LinkX revenues for both InfiniBand and Ethernet grow in 2017 and beyond.
Management believes that the launch of 200 Gigabit HDR solutions in 2017 will further strengthen the company’s competitive position against Intel’s INTC Omni-Path. Notably, revenues from EDR 100 Gigabit per second InfiniBand products (40.9% of InfiniBand revenues) were up 89% year over year in first-quarter 2017.
We note that recent contract wins from NASA Ames Research Center and RIIT (Research Institute for Information Technology) at the Kyushu University, Japan reflects improving demand for EDR InfiniBand solutions.
Nevertheless, stiff competition from Intel is a major headwind. Although Mellanox haven’t lost any market share (according to management) in the recent quarter, Intel’s aggressive pricing strategy remains a concern, in our view.
Zacks Rank & Key Pick
Mellanox carries a Zacks Rank #5 (Strong Sell). Applied Optoelectronics AAOI sporting a Zacks Rank #1 (Strong Buy) is a better-ranked stock in the same sector. You can see the complete list of today’s Zacks #1 Rank stocks here.
Long-term earnings growth for Applied Optoelectronics is currently pegged at 20%.
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