EZchip Semiconductor (EZCH) Could Drop to $14 as Hype Wears Off
1:07 PM ET, 12/17/2012 - Street Insider
Shares of EZchip Semiconductor Ltd (NASDAQ: EZCH) are under pressure Monday following a negative research report from Value Bulldog, which suggested the stock is grossly overvalued compared to peers and that 'hockey stick' style growth has not and will not materialize. The report first appeared on SeekingAlpha Pro this morning and will be made to non-subscribers on Thursday, December 20th.
The research highlights that by the company's own admission the high speed merchant NPU market is currently tiny, at just $120 million. However, the market cap of the company is currently over 8x its current addressable market size.
The company already currently controls two-thirds of the market and faces increasing competition. Major customer Cisco will also be playing EZCH against Broadcom and Marvell as well as its own internal ASIC design teams. The research also notes many CESR customers are in-sourcing NPUs and the underlying CESR market is growing slowly.
With EZchip's current market capitalization 4x theoretical future sales, the firm sees limited upside from here. A more realistic but still optimistic scenario is a doubling of sales by 2016 and a normalized 5x EV/sales multiple, which generously implies a stock price of $26.00 a few years hence and a significantly lower share price today. If the hype halo should ever wear off of EZCH due to continued growth disappointments and/or losing share at Cisco, the firm believes downside could be to the $14.00 range which still implies a healthy 5x 2012 EV/revenue multiple.