EZChip Semiconductor (EZCH) is a “fabless” semiconductor company, meaning it makes the design for chips and markets them but does not fabricate the actual hardware. Its gadgets are used in network processors, routers and other high-speed Internet gear — all crucial components for businesses as well as consumers in this data-hungry age.
Semiconductors have been out of favor with many investors thanks to the threat of a “post-PC age,” but remember that all those tablets and smartphones still need connectivity to the Internet. Regardless of whether you’re on a laptop or an iPad you’ll need a network, and network devices are where EZChip makes a lot of its money.
The company has been also suffered because of a transitional 2012, moving over from Juniper (JNPR) as its largest partner to Cisco (CSCO). To wit, JNPR revenue was down 39% in fiscal 2012 while CSCO revenue increased by roughly the same amount. Cisco now accounts for 43% of total EZChip sales.
Fiscal 2012 earnings for EZCH were nearly double 2011 numbers, though admittedly revenue was soft and bigger margins from Cisco helped drive those profits. Going forward, the question is how EZChip will grow now that it has basically switched from one major networking partner to another.
I remain convinced that EZCH can get a bigger piece of the pie simply by virtue of the pie getting bigger, thanks to data-hungry consumers and businesses. Shares are down 14% year-to-date in 2013 but have shown significant strength since May 1 even as the rest of the market has stalled out.