Why Losing Cisco Is Problematic To EZChip

Barclays cut its price target on EZchip Semiconductor Ltd (NASDAQ: EZCH) Thursday from $23 to $16 and maintained a Equal-Weight rating.

Analysts Joseph Wolf and Blayne Curtis said the company’s Q1 results and guidance were overshadowed by the loss of Cisco Systems, Inc. (NASDAQ: CSCO) for NPS-400 functionality.

Thirty-five percent of the current NPU product line was allocated to Cisco, according to Wolf, and the stock’s sell-off highlighted this as one of the largest single risks to the company.

“While management took the long view and explained that its extension with the NPS product line into layers 4-7 and the acquisition of Tilera were targeted at reducing customer concentration, losing CSCO for the first round of the NPS, in EZCH's core market is difficult to view positively,” Wolf wrote.

The analysts were confident, based on a 7-10 year cycle for large comms equipment, that sales to Cisco of the NP5 would “remain strong for several years and the near-term estimates" were not at risk.

Wolf felt that stock might not have much more room to fall and was bolstered by a cash balance of approximately $6 per share, however, the multiple was likely to remain “stuck for some time.”

An Equal-Weight rating was maintained because the analysts saw “few near-term catalysts and while CSCO could come back, and management remains optimistic in this regard,” the analysts suspected “that will be unknown for some time.”

The $16 price target was based on the stock trading at 12x the firm’s 2016 EPS estimate of $1.37.

EZchip Semiconductor recently traded at $14.86, up 0.13 percent.