Nvidia (NASDAQ:NVDA) is one of the few that is near its all-time highs, NVDA stock has added more than 25% so far this year. And to keep up the growth, CEO Jensen Huang has been doing something that is fairly different for his company: acquisitions.
There are clear benefits to the strategy. First of all, the technology creation process can take too long and this could mean missing out on big-time opportunities. Next, without acquisitions, there is the potential danger that the culture will get too insular. What’s more, M&A can expand the monetization opportunities and result in a more robust customer base.
OK then, so let’s take a look at the deal for Mellanox Technologies — which should be a nice driver for NVDA stock. It’s actually the biggest acquisition in the company’s history, at about $6.9 billion.
NVDA Stock and Mellanox
Founded at the height of the dot-com boom in 1999, Mellanox Technologies was created by former executives from Intel (NASDAQ:INTC) and Galileo Technology.
The initial focus was on the development of integrated circuits. But over time, the founders realized there was an opportunity with high-compute environments, involving Ethernet, switches, servers, and InfiniBand networks. And yes, the timing was spot-on as various trends started to emerge, such as for cloud computing and mobile computing.
Consider that Mellanox’s technology provides major benefits like low latency, high throughput and reduced database recovery time. Just some of the use cases include: real-time fraud detection for PayPal (NASDAQ:PYPL), image recognition for Baidu (NASDAQ:BIDU), and high-speed streaming for Neflix (NASDAQ:NFLX).
What about the market opportunity? It’s enormous. Mellanox estimates it at $19 billion.
In fact, here’s what Huang had to say about the deal:
“The expanding use of AI and data science is reshaping computing and data center architectures. With Mellanox, the new NVIDIA has end-to-end technologies from AI computing to networking, full-stack offerings from processors to software, and significant scale to advance next-generation data centers. Our combined expertise, supported by a rich ecosystem of partners, will meet the challenge of surging global demand for consumer internet services, and the application of AI and accelerated data science from cloud to edge to robotics.”
But the Mellanox is not the only acquisition that should help NVDA stock. The company also acquired Cumulus Networks, which has built an open platform for network switches (the company raised $134 million in venture capital from investors like Andreessen Horowitz and Sequoia Capital).
Keep in mind that Cumulus and Mellanox have forged a strong partnership as well. So with Nvidia’s ownership, there should be even more seamless integration in terms of software and hardware – helping to further boost penetration in the data center.
Bottom Line on Nvidia Stock
Now it’s true that acquisitions can be risky. After all, Nvidia is paying top dollar for Mellanox, but it’s important to keep in mind that both companies have had a long-standing relationship. This should help mitigate potential issues.
But the recent dealmaking is a clear indication of Nvidia’s confidence in its business. Huang realizes that the data center opportunity is secular and that customers want comprehensive solutions.
“Machine learning and AI is changing how Nvidia is becoming a second reliable compute provider in this market,” said Omer Cheema, who is the Head of Technology Strategy at Samsung’s semiconductor business. “In order to be a leader — who defines the next-gen data center architecture — the company needs to build deep capabilities in connectivity and storage areas. Their recent acquisitions are the first steps towards this long-term goal.”
Granted, when it comes to NVDA stock though, it is far from cheap. Consider that the forward price-to-earnings ratio is 39X. Yet the shares deserve a premium because of its long-term growth profile, which has been boosted with its recent dealmaking. And the acquisitions for both Mellanox and Cumulus look spot-on.
Tom Taulli (@ttaulli) is the author of various books on investing and technology, including Artificial Intelligence Basics, High-Profit IPO Strategies and All About Short Selling. He is also the founder of WebIPO, which was one of the first platforms for public offerings during the 1990s. As of this writing, he did not hold a position in any of the aforementioned securities.
