Why Mellanox Shares Plunged

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Mellanox Technologies (Nasdaq: MLNX  ) sank 12% today after a Wall Street analyst downgraded the Israeli chip maker and Intel (Nasdaq: INTC  ) lowered its third-quarter sales forecast.

So what: Mellanox shares have soared in 2012 on breakneck sales growth, but downbeat guidance from tech bellwether Intel suggests a larger-than-expected slowdown in the sector. Analyst Stifel Nicolaus  even cut its recommendation on Mellanox from buy to hold on a forecast of slowing demand going forward, making the decision to flee the sector that much easier for shareholders.

Now what: I wouldn't be so quick to pounce on this plunge. Even with today's pullback, Mellanox shares are still up a staggering 210% year to date and trade at a lofty P/E of around 75. Given the clear demand headwinds working against the semiconductor space, Mellanox's risk-reward trade-off seems particularly unfavorable at this point.

Interested in more info on Mellanox? Add it to your watchlist.

Fool contributor Brian Pacampara owns no position in any of the companies mentioned. The Motley Fool owns shares of Intel. Motley Fool newsletter services have recommended buying shares of Intel. Try any of our Foolish newsletter services free for 30 days.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy always gets a perfect score.


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