Mellanox Tech (MLNX 84.08, -7.80, -8.49%) is trading sharply lower today. While
the company did produce some news of its own this morning, having announced
that it has hired a new CFO, the weakness in shares today appears to be related
more strongly to Apple's (AAPL) lowered guidance.
Mellanox is an Israel-based supplier of interconnects using Ethernet technology. Servers, storage systems, and embedded system equipment all need to talk to each other and transmit data between them. Mellanox makes the interconnections that allow these pieces of equipment to talk with each other. Its products include adapters, gateway and switch ICs, adapter cards, switch systems, gateway systems, software, and cables. High-performance interconnects have an important influence on performance because they can remove bottlenecks by enabling the fast transfer of data, latency reduction, and more.
MLNX has two product technologies, Ethernet and InfiniBand, and these, according to Mellanox, are truly leaders in their respective markets. Ethernet switches have been key drivers of revenue for MLNX. More OEMs are using its Spectrum switches, and MLNX is now penetrating the storage switching market with Spectrum as a storage fabric in some applications.
Apple cited weakness in China as the main culprit for its lowered guidance. About 20% of MLNX's sales come from China, which is pretty substantial. Also, MLNX has a lot of exposure to end customers across high-performance computing (HPC), Web 2.0, cloud, enterprise data centers (EDC), financial services and storage markets. These customers purchase servers, storage, communications infrastructure, and similar technology from major suppliers like Hewlett Packard Enterprise (HPE) and Dell (DELL), which use MLNX interconnects.
Beyond just Apple, there are concerns that the Chinese economy is slowing, partly fueled by trade disputes with the U.S. A slowing Chinese economy is bad for the world economy, and it's bad for U.S. companies, particularly those with strong international exposure, as China is home to roughly 20-25% of the world's population, which helps to give the country huge importance as a market space.
Of recent note for the company and its shares, MLNX has been the subject of news reports claiming that it's being looked at as a potential takeover candidate. A December report from The Times of Israel, which quoted a financial paper called TheMarker, said that Microsoft (MSFT) was interested in acquiring MLNX, which is a supplier to Microsoft. This followed a November CNBC.com report that said that Xilinx (XLNX) had hired Barclays to advise on a bid to acquire Mellanox after approaching the chipmaker with an offer. Concerns that could hush that buzz now include fear that a slowing global economy and a weak Chinese economy could cool the interest of potential suitors in buying MLNX. This concern could be another reason for the stock’s decline today.
In sum, 2019 is getting off to a rocky start, and not only for Mellanox and many of its tech sector peers. Glancing at a very different sector that has also reported impact from the dispute, recall that Ford (F) recently said that sales in China dropped substantially in 2018, and they cited tariffs for their higher prices for steel and aluminum. It's becoming evident, and it may become increasingly evident once the next heavy earnings season arrives, that the trade dispute between China and the U.S. is hurting financial results for U.S. companies in broad fashion, and it’s not yet certain when a trade deal will manage to bring about resolution.
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