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Stop and Think Before Selling These Leaders: Apple Inc. (AAPL), Mellanox Technologies Ltd. (MLNX)

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Investors have been a little trigger-happy lately, hitting the sell button on any hint of changing trends at their companies.  While your broker certainly enjoys the business, trading on emotion isn’t likely to do too much for your portfolio.  Businesses usually aren’t built or destroyed overnight, so investors need to separate short-term fluctuations from long term trends.  Let’s look at two situations.

The rise of InfiniBand

Shareholders of Mellanox Technologies, Ltd. (NASDAQ:MLNX) have been on an uncomfortable roller-coaster lately, as the company’s share price has declined over 50% since August 2012.  Mellanox has been growing very fast recently, with a 208.3% increase in revenues over the past four fiscal years.  However, potential competition from industry giant Intel and delayed orders have led some analysts to question its growth trajectory.

Mellanox Technologies, Ltd. (NASDAQ:MLNX)Founded in 1999, Mellanox manufactures semiconductor products that allow servers in data centers to work more efficiently and with greater stability.  It has been one of the chief proponents of InfiniBand, a technology architecture that competes with widely-used Ethernet.  Mellanox’s sales have benefited from soaring demand, as its data center customers deal with the huge volumes of transactions that have resulted from the growth in online business and cloud computing activities.

In its latest quarter, Mellanox reported increases in revenues and adjusted operating income of 68.0% and 152.8%, respectively, versus the prior-year period.  The company benefited from its outsourced business model, which allowed it to generate higher gross and operating margins during the period.  While management has noted some softness in orders during its last two conference calls, the insatiable demand for cost savings and energy efficiency in the data center environment should lead to strong future demand for Mellanox’s products.  With $400 million in cash and a reasonable 15 P/E multiple, Mellanox is positioned for success.

The Cupertino giant

Meanwhile, shareholders of Apple Inc. (NASDAQ:AAPL) have been on a similar downward slope lately, with the company’s share price down 30% since August 2012.  Despite growing its revenues by 317.5% over the past four fiscal years, Apple Inc. (NASDAQ:AAPL) is valued at only a 10 P/E multiple.  With competition on all fronts, including a high-profile legal tussle with Samsung, investors question whether the company can continue to deliver strong growth without founder Steve Jobs.

In the first quarter of FY2013, Apple Inc. (NASDAQ:AAPL) reported a 17.7% increase in revenues, but operating income fell 0.8%.  Its iPhone and iPad shipments rose sharply, while Mac shipments fell as a result of weak PC sales across the industry.  Product prices were generally flat versus the prior year, although the iPad segment exhibited declining prices due to the introduction of the less-expensive iPad Mini during the period.  More importantly, gross and operating margins contracted as a result of the customer shift toward phones and tablets, as well as the need to continually invent exciting, new products.

Many of Apple Inc. (NASDAQ:AAPL)’s products have enjoyed premium prices versus competitors’ products, leading to a high operating margin that still exceeded 30% in the first quarter of FY2013.  At the company’s current size of roughly $150 billion in annual sales, it will be hard to maintain profitability at the current level across its diverse, ultra-competitive markets.  With $130 billion in cash and a low valuation, though, Apple Inc. (NASDAQ:AAPL) has a nice margin of error to build or buy businesses that will add to its intrinsic value.

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