Israel-based EZchip Semiconductor Ltd. (NASDAQ: EZCH) is an acquisition target for a handful of communication integrated circuit companies and could be a logical fit with Marvell Technology Group (NASDAQ: MRVL), an analyst at Benchmark Capital wrote in a note to clients.
Marvell is earning a very low interest rate on its $2.7 billion in cash. Given EZchip's profitability and the minimal amount of interest income Marvell would forgo, we estimate Marvell could pay $43/share for EZchip and still drive accretion on a non- GAAP basis, said analyst Gary Mobley, who initiated the coverage of the company with a buy rating.
Based on the 27.13 million shares outstanding as of Dec.31 and the analyst's $43 a share estimate, EZchip could be valued at $1.17 billion. The company's market capital stands at about $734 million, with enterprise value at about $693 million.
In 2010, the company generated revenues of $62.0 million, an increase of 55 percent from last year and ended 2010 with a net cash of $101.3 million.
Mobley said over the long-term, EZchip's revenue and EPS growth will likely benefit from growth in IP-based data traffic, increasing share gains within the overall network processors market.
With approximately 75 percent market share, EZchip is the leading merchant supplier of high-speed (>20Gbps) network processors (NPUs), which are key piece of silicon in carrier Ethernet switches and routers.
The served available market for high-speed NPUs should grow from $80 million during 2010 to $360 million during 2014, representing a compound annual growth rate of 47 percent.
EZchip is also set to benefit from a step-function increase in the company's served available market, resulting from the industry's transition to 100Gbps+ line speeds and an expanding gross margin due to high barriers to competition and an increasing mix of revenue coming from Cisco/Marvell.
Also, the analyst said the company's shares have corrected recently due to inventory rebalancing at key customers such as Cisco/Marvell and ZTE. In addition, investors have grown concerned about the rate at which EZchip's sales to Juniper will decline.
As a result, we believe now is an excellent entry point for both short-and long-term oriented investors, Mobley wrote.
Mobley has a price target of $43 on EZchip stock.
Shares of EZchip were up 41 cents or 1.39 percent at $29.17 on Nasdaq.