| | | Nomura :
We see Mellanox as an attractive investment that will likely continue to benefit for next several years from increasing demand for low-latency NICs and interconnect for compute and storage nodes in data centers. In addition, we think competition from Omni Scale in HPC does not meaningfully impact the merits of our investment case and our price target of $75 for Mellanox.
• Post EZchip acquisition, HPC is ~30-32% of sales for Mellanox, which is the target of Intel's Omni Scale interconnect. We believe that Mellanox will have a very high overall share in the 100Gbps interconnect refresh due to availability and maturity of Mellanox’s InfiniBand solutions. In that light, even if considering an extreme case of Intel taking 25-50% share in the next 3-4 years, it would impact 7-15% of sales. Furthermore, since we expect Ethernet to grow faster than InfiniBand, we think the eventual impact will likely be even lower.
• That said, it is our understanding that Omni Scale will likely use Xeon Phi based offload approach, which makes sense as Omni is initially getting integrated into Xeon-Phi (Knights Landing). This, however, has interesting implications. 1) We note that only 15-18% of TOP500 supercomputers use Phi as an accelerator. Assuming this to be the representative HPC SAM that could be targeted by Omni Scale and further assuming a high 50% adoption of Omni in these systems, we estimate it would give Omni 79% of share in HPC and would likely impact only~3-5% of Mellanox’s revenue next year; 2) We think Phi-based offload approach will likely be less efficient for HPC systems that are not using Phi as an accelerator vs. Mellanox’s custom offload silicon.
• As such, we think that success of Xeon Phi as an accelerator in HPC will likely be the key determinant of adoption of Omni as well, to a large extent.
• Moreover, we see Ethernet business to drive upside from both NIC (25/40/50G) and switch shipments. Ethernet NIC market is expected to be $1.2-1.3b in 2018. Mellanox currently has 18-20% share of the NIC market, which we expect to continue to increase in ’16 and ’17. See our prior note on Ethernet NIC opportunity (link).
• We also believe that expiration of go-shop period for EZchip leaves very limited options for EZchip shareholders and expect Mellanox to close the transaction in Q1. We estimate that EZchip will be roughly 40% accretive and should add ~$1.00 in EPS in ’16.
• We maintain our Buy rating. |
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