Investors in data center connectivity specialist Mellanox Technologies (NASDAQ: MLNX) have had quite a lot of reasons to celebrate recently. The company's shares have recently surged following a strong earnings report and upbeat outlook.
For those of you unfamiliar with Mellanox, or who know about it but might be looking to learn more, here are three important growth opportunities for the company.
Image source: Mellanox.
1. Ethernet switches
One area in which Mellanox has been making a splash is in the Ethernet switch market. During the company's most recent earnings call, CEO Eyal Waldman said that the company's Ethernet switch business last quarter enjoyed a revenue run rate of more than $100 million.
Switches aren't that big a part of Mellanox's business yet (the company's revenue in 2018 was about $1.09 billion), but they've become increasingly important and are set to become even more so in 2019. Indeed, Waldman claimed that the company plans for 2019 Ethernet switch revenue growth "to accelerate even faster," suggesting growth of greater than 70% off an even higher baseline.
The nice thing about this opportunity is that the Ethernet switch market is gigantic -- market researchers with IDC say that industrywide revenue was $6.7 billion during the second quarter of 2018. So Mellanox doesn't need to grab a gargantuan market share for this business to have a material impact on its overall financial performance. A $100 million annual run rate (and growing) is still minuscule relative to a market that's in the tens of billions of dollars. (It's also worth noting that the major incumbent players will, of course, fight to protect their share positions.)
2. High-speed Ethernet NICs
Another area where Mellanox has been crushing it is the market for Ethernet network interface cards (NICs). Such cards allow computers to connect to others (often via the aforementioned switches).
According to a recent Mellanox investor presentation, 69% of the market in 2018 was for 10 gigabit Ethernet NICs (greater gigabit numbers mean higher speed), while the remaining 31% of the market consisted of 25-gigabit-and-up adapters.
That landscape, however, looks set to shift dramatically by 2022, according to the company, during which 63% of the market will consist of 25-gigabit-and-up adapters. In dollar terms, Mellanox claims the total addressable market for 25-gigabit adapters will rise from $600 million in 2018 to $1.5 billion by 2022.
The good news for Mellanox and its shareholders is that it has a very strong position in this market. Per that investor presentation, Mellanox captured an eye-popping 69% share in this market during the third quarter of 2018. Now, that figure may decline as competitors work to strengthen their own offerings. But the point is that Mellanox's technology execution here seems to be spot-on and a signal that it could continue to lead during future Ethernet technology transitions.
3. BlueField SmartNIC
Mellanox has also been talking up its BlueField SmartNIC products. According to Waldman, these products will be used to "offload network stores, security, and virtualization from the main CPU."
While Mellanox isn't banking on a near-term revenue impact from selling its BlueField products into the storage market, Waldman said that these products should begin ramping up in the second half of this year "and see more meaningful revenue in 2020."
It's not clear what the long-term total addressable market for these products will ultimately work out to. But I do think these products (and others like them) will offer significant value to prospective customers, and I'd imagine that Mellanox will be able to generate meaningful amounts of revenue and profit from them in the coming years.
Why Mellanox is worth a closer look
Mellanox is a company that both executes well in bringing competitive products to the marketplace and in generating significant revenue and profit from those products. Should that execution continue to be strong, and if the company continues to grow its share of the markets in which it participates, I'd expect Mellanox to keep churning out strong financial performances and, ultimately, value for its shareholders.
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