Intrinsic value of Mellanox Technologies - MLNX

Previous Close

$83.95

  Intrinsic Value

$10.88

stock screener

  Rating & Target

str. sell

-87%

Previous close

$83.95

 
Intrinsic value

$10.88

 
Up/down potential

-87%

 
Rating

str. sell

We calculate the intrinsic value of MLNX stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 2017), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 4.2

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046
   2047

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  2.00
  2.30
  2.57
  2.81
  3.03
  3.23
  3.41
  3.57
  3.71
  3.84
  3.95
  4.06
  4.15
  4.24
  4.31
  4.38
  4.44
  4.50
  4.55
  4.59
  4.64
  4.67
  4.70
  4.73
  4.76
  4.78
  4.81
  4.83
  4.84
  4.86
Revenue, $m
  881
  902
  925
  951
  980
  1,011
  1,046
  1,083
  1,123
  1,166
  1,212
  1,261
  1,314
  1,370
  1,429
  1,491
  1,557
  1,628
  1,702
  1,780
  1,862
  1,949
  2,041
  2,138
  2,239
  2,347
  2,459
  2,578
  2,703
  2,834
Variable operating expenses, $m
  848
  866
  887
  909
  935
  963
  993
  1,026
  1,062
  1,100
  1,070
  1,114
  1,160
  1,209
  1,261
  1,317
  1,375
  1,437
  1,502
  1,571
  1,644
  1,721
  1,802
  1,887
  1,977
  2,072
  2,171
  2,276
  2,386
  2,502
Fixed operating expenses, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total operating expenses, $m
  848
  866
  887
  909
  935
  963
  993
  1,026
  1,062
  1,100
  1,070
  1,114
  1,160
  1,209
  1,261
  1,317
  1,375
  1,437
  1,502
  1,571
  1,644
  1,721
  1,802
  1,887
  1,977
  2,072
  2,171
  2,276
  2,386
  2,502
Operating income, $m
  33
  36
  38
  41
  45
  48
  52
  57
  61
  66
  142
  148
  154
  160
  167
  175
  182
  191
  199
  208
  218
  228
  239
  250
  262
  275
  288
  302
  317
  332
EBITDA, $m
  189
  193
  198
  204
  210
  217
  224
  232
  241
  250
  260
  270
  281
  293
  306
  319
  334
  349
  365
  381
  399
  418
  437
  458
  480
  503
  527
  552
  579
  607
Interest expense (income), $m
  5
  4
  4
  5
  5
  6
  6
  7
  8
  9
  9
  10
  11
  12
  14
  15
  16
  17
  19
  20
  22
  24
  25
  27
  29
  31
  34
  36
  38
  41
  44
Earnings before tax, $m
  29
  31
  33
  36
  39
  42
  45
  49
  53
  57
  132
  136
  141
  147
  153
  159
  165
  172
  179
  187
  195
  203
  212
  221
  231
  241
  252
  264
  276
  288
Tax expense, $m
  8
  8
  9
  10
  10
  11
  12
  13
  14
  15
  36
  37
  38
  40
  41
  43
  45
  46
  48
  50
  53
  55
  57
  60
  62
  65
  68
  71
  74
  78
Net income, $m
  21
  23
  24
  26
  28
  31
  33
  36
  39
  42
  96
  100
  103
  107
  111
  116
  120
  125
  131
  136
  142
  148
  155
  161
  169
  176
  184
  193
  201
  211

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  1,352
  1,383
  1,418
  1,458
  1,502
  1,551
  1,604
  1,661
  1,722
  1,789
  1,859
  1,935
  2,015
  2,100
  2,191
  2,287
  2,389
  2,496
  2,610
  2,730
  2,856
  2,990
  3,130
  3,279
  3,435
  3,599
  3,772
  3,954
  4,145
  4,347
Adjusted assets (=assets-cash), $m
  1,352
  1,383
  1,418
  1,458
  1,502
  1,551
  1,604
  1,661
  1,722
  1,789
  1,859
  1,935
  2,015
  2,100
  2,191
  2,287
  2,389
  2,496
  2,610
  2,730
  2,856
  2,990
  3,130
  3,279
  3,435
  3,599
  3,772
  3,954
  4,145
  4,347
Revenue / Adjusted assets
  0.652
  0.652
  0.652
  0.652
  0.652
  0.652
  0.652
  0.652
  0.652
  0.652
  0.652
  0.652
  0.652
  0.652
  0.652
  0.652
  0.652
  0.652
  0.652
  0.652
  0.652
  0.652
  0.652
  0.652
  0.652
  0.652
  0.652
  0.652
  0.652
  0.652
Average production assets, $m
  856
  875
  898
  923
  951
  982
  1,015
  1,051
  1,090
  1,132
  1,177
  1,225
  1,276
  1,330
  1,387
  1,448
  1,512
  1,580
  1,652
  1,728
  1,808
  1,893
  1,982
  2,076
  2,174
  2,278
  2,388
  2,503
  2,624
  2,752
Working capital, $m
  5
  5
  6
  6
  6
  6
  6
  6
  7
  7
  7
  8
  8
  8
  9
  9
  9
  10
  10
  11
  11
  12
  12
  13
  13
  14
  15
  15
  16
  17
Total debt, $m
  79
  87
  97
  107
  118
  131
  145
  160
  176
  193
  211
  231
  252
  274
  298
  322
  349
  377
  406
  438
  470
  505
  542
  580
  621
  664
  709
  756
  806
  858
Total liabilities, $m
  351
  360
  369
  379
  391
  403
  417
  432
  448
  465
  483
  503
  524
  546
  570
  595
  621
  649
  679
  710
  743
  777
  814
  852
  893
  936
  981
  1,028
  1,078
  1,130
Total equity, $m
  1,000
  1,023
  1,050
  1,079
  1,112
  1,148
  1,187
  1,229
  1,275
  1,324
  1,376
  1,432
  1,491
  1,554
  1,621
  1,692
  1,768
  1,847
  1,931
  2,020
  2,114
  2,212
  2,316
  2,426
  2,542
  2,663
  2,791
  2,926
  3,068
  3,217
Total liabilities and equity, $m
  1,351
  1,383
  1,419
  1,458
  1,503
  1,551
  1,604
  1,661
  1,723
  1,789
  1,859
  1,935
  2,015
  2,100
  2,191
  2,287
  2,389
  2,496
  2,610
  2,730
  2,857
  2,989
  3,130
  3,278
  3,435
  3,599
  3,772
  3,954
  4,146
  4,347
Debt-to-equity ratio
  0.080
  0.090
  0.090
  0.100
  0.110
  0.110
  0.120
  0.130
  0.140
  0.150
  0.150
  0.160
  0.170
  0.180
  0.180
  0.190
  0.200
  0.200
  0.210
  0.220
  0.220
  0.230
  0.230
  0.240
  0.240
  0.250
  0.250
  0.260
  0.260
  0.270
Adjusted equity ratio
  0.740
  0.740
  0.740
  0.740
  0.740
  0.740
  0.740
  0.740
  0.740
  0.740
  0.740
  0.740
  0.740
  0.740
  0.740
  0.740
  0.740
  0.740
  0.740
  0.740
  0.740
  0.740
  0.740
  0.740
  0.740
  0.740
  0.740
  0.740
  0.740
  0.740

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  21
  23
  24
  26
  28
  31
  33
  36
  39
  42
  96
  100
  103
  107
  111
  116
  120
  125
  131
  136
  142
  148
  155
  161
  169
  176
  184
  193
  201
  211
Depreciation, amort., depletion, $m
  156
  158
  160
  162
  165
  168
  172
  175
  179
  183
  118
  122
  128
  133
  139
  145
  151
  158
  165
  173
  181
  189
  198
  208
  217
  228
  239
  250
  262
  275
Funds from operations, $m
  177
  180
  184
  189
  194
  199
  205
  211
  218
  225
  214
  222
  231
  240
  250
  261
  272
  283
  296
  309
  323
  337
  353
  369
  386
  404
  423
  443
  464
  486
Change in working capital, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  1
  1
  1
  1
  1
  1
  1
  1
  1
Cash from operations, $m
  177
  180
  184
  189
  193
  199
  204
  211
  217
  225
  213
  222
  231
  240
  250
  260
  271
  283
  295
  309
  322
  337
  352
  368
  385
  403
  422
  442
  463
  485
Maintenance CAPEX, $m
  -84
  -86
  -88
  -90
  -92
  -95
  -98
  -102
  -105
  -109
  -113
  -118
  -122
  -128
  -133
  -139
  -145
  -151
  -158
  -165
  -173
  -181
  -189
  -198
  -208
  -217
  -228
  -239
  -250
  -262
New CAPEX, $m
  -17
  -20
  -22
  -25
  -28
  -31
  -33
  -36
  -39
  -42
  -45
  -48
  -51
  -54
  -57
  -61
  -64
  -68
  -72
  -76
  -80
  -84
  -89
  -94
  -99
  -104
  -110
  -115
  -121
  -128
Cash from investing activities, $m
  -101
  -106
  -110
  -115
  -120
  -126
  -131
  -138
  -144
  -151
  -158
  -166
  -173
  -182
  -190
  -200
  -209
  -219
  -230
  -241
  -253
  -265
  -278
  -292
  -307
  -321
  -338
  -354
  -371
  -390
Free cash flow, $m
  76
  75
  74
  74
  73
  73
  73
  73
  73
  74
  55
  56
  57
  58
  59
  61
  62
  64
  65
  67
  69
  72
  74
  76
  79
  82
  85
  88
  91
  95
Issuance/(repayment) of debt, $m
  6
  8
  9
  10
  11
  13
  14
  15
  16
  17
  18
  20
  21
  22
  24
  25
  26
  28
  30
  31
  33
  35
  37
  39
  41
  43
  45
  47
  50
  52
Issuance/(repurchase) of shares, $m
  0
  0
  2
  3
  4
  5
  6
  7
  7
  7
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from financing (excl. dividends), $m  
  6
  8
  11
  13
  15
  18
  20
  22
  23
  24
  18
  20
  21
  22
  24
  25
  26
  28
  30
  31
  33
  35
  37
  39
  41
  43
  45
  47
  50
  52
Total cash flow (excl. dividends), $m
  83
  83
  85
  87
  89
  91
  93
  94
  96
  98
  74
  76
  78
  80
  83
  86
  89
  92
  95
  99
  102
  106
  110
  115
  120
  125
  130
  135
  141
  147
Retained Cash Flow (-), $m
  -20
  -23
  -26
  -30
  -33
  -36
  -39
  -42
  -46
  -49
  -52
  -56
  -59
  -63
  -67
  -71
  -75
  -80
  -84
  -89
  -94
  -99
  -104
  -110
  -116
  -122
  -128
  -135
  -142
  -149
Prev. year cash balance distribution, $m
  77
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
  69
  71
  72
  74
  76
  78
  81
  84
  87
  90
  93
  97
  101
  105
  110
  114
  119
  125
  130
  136
  142
  149
  156
  163
  171
  179
  188
  197
  206
  216
Cash available for distribution, $m
  140
  60
  59
  58
  56
  55
  54
  52
  51
  49
  22
  20
  19
  17
  16
  15
  13
  12
  11
  10
  9
  8
  6
  5
  4
  3
  2
  1
  0
  -2
Discount rate, %
  4.30
  4.52
  4.74
  4.98
  5.23
  5.49
  5.76
  6.05
  6.35
  6.67
  7.00
  7.35
  7.72
  8.11
  8.51
  8.94
  9.39
  9.86
  10.35
  10.87
  11.41
  11.98
  12.58
  13.21
  13.87
  14.56
  15.29
  16.05
  16.86
  17.70
PV of cash for distribution, $m
  134
  55
  51
  47
  44
  40
  36
  33
  29
  26
  10
  9
  7
  6
  5
  4
  3
  2
  2
  1
  1
  1
  0
  0
  0
  0
  0
  0
  0
  0
Current shareholders' claim on cash, %
  100.0
  100.0
  99.9
  99.9
  99.8
  99.7
  99.5
  99.4
  99.2
  99.1
  99.1
  99.1
  99.1
  99.1
  99.1
  99.1
  99.1
  99.1
  99.1
  99.1
  99.1
  99.1
  99.1
  99.1
  99.1
  99.1
  99.1
  99.1
  99.1
  99.1

Mellanox Technologies, Ltd. is a fabless semiconductor company. The Company is an integrated supplier of interconnect products and solutions based on the InfiniBand and Ethernet standards. The Company operates in the development, manufacturing, marketing and sales of interconnect products segment. Its products facilitate data transmission between servers, storage systems, communications infrastructure equipment and other embedded systems. It operates its business globally and offers products to customers at various levels of integration. The products it offers include integrated circuits (ICs), adapter cards, switch systems, multi-core and network processors, cables, modules, software, services and accessories. Together these products form a networking solution, focused on computing, storage and communication applications used in multiple markets, including high-performance computing (HPC), cloud, Web 2.0, storage, financial services, and enterprise data center (EDC).

FINANCIAL RATIOS  of  Mellanox Technologies (MLNX)

Valuation Ratios
P/E Ratio 216.9
Price to Sales 4.8
Price to Book 4.2
Price to Tangible Book
Price to Cash Flow 21
Price to Free Cash Flow 28.4
Growth Rates
Sales Growth Rate 30.4%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 4.1%
Cap. Spend. - 3 Yr. Gr. Rate 6.1%
Financial Strength
Quick Ratio 14
Current Ratio 0
LT Debt to Equity 22.3%
Total Debt to Equity 24.8%
Interest Coverage 6
Management Effectiveness
Return On Assets 1.8%
Ret/ On Assets - 3 Yr. Avg. 2.9%
Return On Total Capital 1.8%
Ret/ On T. Cap. - 3 Yr. Avg. 3.4%
Return On Equity 2.1%
Return On Equity - 3 Yr. Avg. 3.5%
Asset Turnover 0.7
Profitability Ratios
Gross Margin 64.8%
Gross Margin - 3 Yr. Avg. 68%
EBITDA Margin 14.8%
EBITDA Margin - 3 Yr. Avg. 13.2%
Operating Margin 3.6%
Oper. Margin - 3 Yr. Avg. 4.5%
Pre-Tax Margin 2.8%
Pre-Tax Margin - 3 Yr. Avg. 4.3%
Net Profit Margin 2.2%
Net Profit Margin - 3 Yr. Avg. 3.7%
Effective Tax Rate 20.8%
Eff/ Tax Rate - 3 Yr. Avg. -101.1%
Payout Ratio 0%

MLNX stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the MLNX stock intrinsic value calculation we used $864 million for the last fiscal year's total revenue generated by Mellanox Technologies. The default revenue input number comes from 2017 income statement of Mellanox Technologies. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our MLNX stock valuation model: a) initial revenue growth rate of 2% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 4.3%, whose default value for MLNX is calculated based on our internal credit rating of Mellanox Technologies, is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of Mellanox Technologies.
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of MLNX stock the variable cost ratio is equal to 96.4%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $0 million in the base year in the intrinsic value calculation for MLNX stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 5.4% for Mellanox Technologies.

Corporate tax rate of 27% is the nominal tax rate for Mellanox Technologies. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the MLNX stock is equal to 8%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for MLNX are equal to 97.1%.

Life of production assets of 10 years is the average useful life of capital assets used in Mellanox Technologies operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for MLNX is equal to 0.6%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $1057 million for Mellanox Technologies - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 50 million for Mellanox Technologies is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of Mellanox Technologies at the current share price and the inputted number of shares is $4.2 billion.

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COMPANY NEWS

▶ 5 Technology Stocks Set to Trump Estimates in Q2 Earnings   [Jul-19-18 11:18AM  InvestorPlace]
▶ Mellanox: 2Q Earnings Snapshot   [Jul-17-18 04:23PM  Associated Press]
▶ Mellanox Achieves Another Record Quarter   [04:05PM  Business Wire]
▶ Bull of the Day: Mellanox (MLNX)   [05:00AM  Zacks]
▶ 3 Strong Buy Semiconductor Stocks to Consider Now   [Jul-12-18 12:40PM  InvestorPlace]
▶ Mellanox, Starboard settle on new board members   [Jun-19-18 06:30PM  Reuters]
▶ Mellanox Announces Agreement with Starboard   [04:15PM  Business Wire]
▶ 5 Top Liquid Stocks for a Winning Portfolio   [Jun-18-18 11:48AM  InvestorPlace]
▶ 'Smart' Vendors Make Splash   [May-30-18 10:00AM  Forbes]
▶ Israeli Chip Stock Jumps On Increased Sales Guidance   [May-17-18 04:45PM  Investor's Business Daily]
▶ Bull of the Day: Mellanox (MLNX)   [07:00AM  Zacks]
▶ Mellanox Sends Letter to Shareholders   [06:17AM  Business Wire]
▶ Top Ranked Growth Stocks to Buy for April 24th   [Apr-24-18 10:06AM  Zacks]
▶ Mellanox Technologies Has a Potential Winning Combination   [Apr-18-18 02:15PM  TheStreet.com]
▶ Mellanox: 1Q Earnings Snapshot   [Apr-17-18 08:07AM  Associated Press]
▶ Why Mellanox Technologies Ltd (NASDAQ:MLNX) Could Be A Buy   [Apr-11-18 07:27AM  Simply Wall St.]
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