Nvidia Acquires Mellanox: What Does the Deal Mean for Intel Stock?

The consolidation wave in the semiconductor space continues. The latest deal was announced today, with Nvidia (NASDAQ:NVDA) agreeing to shell out nearly $7 billion for Mellanox Technologies (NASDAQ:MLNX). But of course, there were various bidders for the deal, like Xilinx (NASDAQ:XLNX) and Microsoft (NASDAQ:MSFT). Yet perhaps the most interesting was Intel (NASDAQ:INTC). So far the impact on Intel stock has been negligible, but I still believe the merger is concerning for INTC.

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The merger does make a lot of sense for both MLNX and NVDA, as both companies have been long-time partners. They also are leaders in the category for high-performance computing. NVIDA, for example, develops GPUs (Graphics Processing Units) whereas Mellanox focuses on technologies for internet connections. (Both companies developed the world’s two fastest super computers for the U.S. Department of Energy.) With the transaction, the combined company will power more than 250 of the world’s 500 largest supercomputers.

The Implications for Intel Stock

So then, what are the implications of the NVDIA/Mellanox combination? Well, so far, the impact on the INTC stock price is negligible. INTC is up about 2.5% since the announcement. And yes, as has been the case with many other tech operators, INTC stock has been rallying lately, up about 18% since late December.

Yet I think the merger should still be concerning (hey, after all, it was Intel’s former CEO Andy Grove who once said “Only the paranoid survive”).Generally, the company’s deal making has been relatively quiet. It most recently acquired Mobileye in March 2017 for the price of $15.3 billion. But if anything, I think Intel should have been more aggressive in going after MLNX.

The reason? For the most part, it’s about AI (artificial intelligence). The market is ripe for secular growth and should be a driver for Intel stock.

According to a report from International Data Corporation (IDC), the spending for AI and cognitive technologies is expected to go from $24 billion in 2018 to a whopping $77.6 billion in 2022. This is a 37.3% annual growth rate.

A key for this will be creating next-generation chips and networking systems. As NVIDIA’s press release notes:

“Datacenters in the future will be architected as giant compute engines with tens of thousands of compute nodes, designed holistically with their interconnects for optimal performance.”

A critical piece of this will be the kind of technology that MLNX offers. Keep in mind that its InfiniBand interconnect technology is becoming a must-have for hyperscale datacenters. It may also prove essential for autonomous vehicles and the development of next-generation quantum computers.

Now it’s true that INTC has not been sitting by and doing nothing. The company has been ramping its efforts with high-performance computing — such as with its Cascade Lake semiconductors — and has a strong InfiniBand business.

INTC has also been investing much more in AI. For example, there is the Intel Nervana Neural Network Processor for Inference (NNP-I), a system that’s built specifically to handle deep learning models. As a testament to the technology, INTC has partnered with Facebook (NASDAQ:FB), which should allow for testing with huge amounts of data.

What’s more, INTC has plans to integrate AI capabilities in its 10nm PC processor. This chip is expected to launch in the fourth quarter.

The Bottom Line on Intel Stock

All in all, I still think the bull case remains intact for Intel stock. The product roadmap looks solid and the company has a massive global infrastructure. So INTC should see growth in the years to come.

Intel stock price is also at a reasonable valuation, with the forward price-to-earnings multiple at a mere 11x. The dividend is at a decent 2.4% as well.

Granted, even though I think Intel stock lost an opportunity with MLNX, it is not a decision that will derail the company. But going forward, it may be a good idea for management to be willing to pay higher premiums, especially as the chip market continues to get more competitive.

Tom Taulli is the author of High-Profit IPO StrategiesAll About Commodities and All About Short SellingFollow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2019/03/nvidia-acquires-mellanox-what-does-the-deal-mean-for-intel-stock/.

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