Kindly note LanOptics’s (LNOP) relatively good performance on NASDAQ. Although the share has fallen far below its peak, it has yielded a return of 280% since the beginning of the year – a rare feat, considering NASDAQ’s depression. LanOptics’s history is, in fact, the history of its subsidiary, EZchip, which recently raised $22 million, at a company value of $122 million. EZchip’s potential has not escaped analysts, at least Israeli ones, and Union Bank economists have issued a “Buy” recommendation for the share, with a target price of $30 –compared with a market price of $21 (reflecting a company value of $144 million).
LanOptics is, in fact, a holding company that manages two start-ups: Netguard, which provides Internet access protection against corporate network break-ins, and EZchip, which develops high-speed switches for web-based data communications.
Union Bank’s economists list three major advantages for EZchip’s products. The first is content switching at the communications protocol’s seventh layer. The new chip not only checks the message’s address and routes it, but also verifies the message content (content switching). If the message is more urgent than others, it gets priority over previously sent messages. The second advantage is that the chip may be fitted with additional applications, so that there is no need to install another chip into the switching system. This enhances the switching system’s flexibility and efficiency. The third advantage is the data transmission speed of 10 Gbps.
EZchip recently signed development contracts with several companies that will manufacture chips for it, in line with its strategy of not relying on a single plant for chip manufacture. The prototype is scheduled to be ready in Q2 2001, and sales of the new chips will start in late 2001. Research company Dataquest assesses that the communications chip market will quadruple in the next three years from $200 million to $800 million. When EZchip starts selling its new chip, the market is expected to be $320-350 million.
In the network processor market, EZchip competes with big communications technology companies that bought the companies that developed first-generation communications chips. The average acquisition price was $511 million. Maker Communications was bought for $990 million by Conexant (which has recently bought Novanet), and SiTera was bought by Vitesse for $750 million.
Union Bank economists say that EZchip is the only company in this sector that has not yet been bought, and that it could therefore be an acquisition target for a big communications company seeking to integrate EZchip’s products in its switching and routing systems. The economists cite EZchip’s 12-month lead over its rivals in developing next-generation chips.
LanOptics’ management is confident that none of EZchip’s competitors has similar communications chip technology. The management also believes that the rivals’ record as first-generation chip developers is not necessarily a guarantee for a smooth transition to developing next-generation chips, because the technology involved is different.
Published by Israel's Business Arena on 31 October, 2000