EZchip Semiconductor Ltd. (EZCH:US) tumbled the most since August in Tel Aviv on concern more customers may develop the Israeli chipmaker’s technology in-house, reducing revenue growth.
Shares of the chipmaker dropped 20 percent, the most since Aug. 9, to 94.85 shekels, or the equivalent of $25.75 at 10:24 a.m. in Tel Aviv. The company’s U.S.-traded shares slumped 21 percent to $25.56 in the U.S. yesterday, sending valuations to 20 times (EZCH:US) estimated earnings, the lowest level since December 2011.
Yokneam, Israel-based EZchip was the worst performer on the Bloomberg Israel-US Equity Index of the largest Israeli companies traded yesterday in New York after Huawei Technologies Co., a Chinese maker of telecommunications equipment, is developing an internal processor and will use EZchip’s product only “when needed,” Eli Fruchter, the chief executive officer of the Israeli company, said on a conference call yesterday after EZchip reported 2012 earnings.
“The long-term thesis on this company is no longer as rosy as people thought it would be, and I would expect you’ll see further downside,” Jay Srivatsa, an analyst at Chardan Capital Markets LLC who rates the stock sell, said by phone yesterday from New York. “They don’t have the wherewithal to sustain the market share loss that comes with an internal solution or losing to their competitors.”
Fruchter said that Huawei’s development was still “mere speculation,” according to the call transcript. A phone message and e-mail left for Jannie Luong, a North American spokeswoman for Shenzhen-based Huawei, was not returned.
Huawei, together with Ericsson AB and Tellabs Inc. (TLAB:US), comprised about 5 percent of EZchip’s revenue in 2012, Fruchter said on the call. If a company like Cisco Systems Inc., which accounted for 43 percent of last year’s sales, decided to internally develop its processors, “investors would essentially throw in the towel on this one,” Srivatsa said.
Juniper, which in 2009 accounted for 54 percent of EZchip’s revenue, is transitioning to internally developed chips for its networking systems, a move that could “seriously impact” EZchip’s sales if other customers don’t make up for the loss, Srivatsa wrote in a note to clients.
EZchip said yesterday that 2012 revenue fell (EZCH:US) 14 percent to $54.7 million as adjusted earnings sank 16 percent to 92 cents per share. Revenue could reach $160 million by 2016, down from the roughly $250 million the company earlier expected based on previous predictions.
“Huawei is a very, very big company, and if they have designs to become a major player in EZchip’s market, this could be a huge opportunity lost,” Mike Burton, an analyst at Brean Capital LLC who has a hold rating on EZchip, said by phone from New York.
Shares in New York traded at a 25 percent premium (EZCH:US) to the average valuation for companies on the Nasdaq Composite Index, the smallest gap in six months, according to data compiled by Bloomberg. EZchip’s slump yesterday was the biggest since Aug. 8 when the company forecast third-quarter sales that missed analyst estimates by about 50 percent.
Israel’s benchmark TA-25 Index dropped 0.2 percent today to 1,223.37.
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