Nvidia (NASDAQ:NVDA) is one of the few that is close to all time highs, NVDA shares have added over 25% this year. And to maintain growth, CEO Jensen Huang has done something quite different for his company: acquisitions.
There are clear benefits in the strategy. First of all, the technology creation process can take too long and this could mean missing out on great opportunities. Subsequently, without acquisitions, there is a potential danger that culture will become too insular. In addition, mergers and acquisitions can expand monetization opportunities and generate a stronger customer base.
OK, so let’s take a look at the deal for Mellanox Technologies, which should be a good driver for NVDA shares. It is actually the largest acquisition in the company’s history, with around $ 6.9 billion.
NVDA and Mellanox stock
Founded at the height of the dot-com boom in 1999, Mellanox Technologies was created by former executives of Intel (NASDAQ:INTC) and Galileo Technology.
Initial attention was paid to the development of integrated circuits. But over time, the founders realized that there was an opportunity with high-computing environments, involving Ethernet, switches, servers and InfiniBand networks. And yes, the times were on time when various trends began to emerge, such as cloud computing and mobile computing.
Consider that Mellanox technology offers important benefits such as low latency, high productivity and reduced database recovery times. Only a few 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 huge. Mellanox estimates it at $ 19 billion.
In fact, here’s what Huang said about the deal:
“The growing use of AI and data science is reshaping computing and data center architectures. With Mellanox, the new NVIDIA features end-to-end technologies, from artificial intelligence to the network, from full-stack offerings from processors to software and from significant dimensions to advance the next generation data centers. Our combined expertise, supported by a rich partner ecosystem, will address the challenge of growing global demand for consumer Internet services and the application of AI and data science accelerated from the cloud to the margins of robotics. “
But Mellanox isn’t the only acquisition that should help NVDA stock. The company also acquired Cumulus Networks, which built an open platform for network switches (the company raised $ 134 million in venture capital from investors such as Andreessen Horowitz and Sequoia Capital).
Keep in mind that Cumulus and Mellanox have also partnered closely. So with Nvidia’s ownership, there should be an even smoother integration in terms of software and hardware, helping to further increase penetration in the data center.
Bottom Line on Nvidia Stock
Now it is true that acquisitions can be risky. After all, Nvidia is paying the maximum 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 problems.
But the recent deal is a clear indication of Nvidia’s trust in her business. Huang realizes that the data center opportunity is centuries old and that customers want complete solutions.
“Machine learning and artificial intelligence are changing the way Nvidia is becoming a second reliable computing provider in this market,” said Omer Cheema, head of Samsung’s semiconductor technology strategy. “To be a leader, who defines the architecture of the new generation data centers, the company must develop profound skills in the areas of connectivity and storage. Their recent acquisitions are the first steps towards this long-term goal. “
Of course, when it comes to NVDA stock, it’s far from cheap. Consider that the forward price / earnings ratio is 39X. However, the shares deserve a reward because of its long-term growth profile, which has been enhanced with its recent trading. And the acquisitions for Mellanox and Cumulus seem accurate.
Tom Taulli (@ttaulli) is the author of various books on investment 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 public offering platforms in the 90s. At the time of writing, he has not held any positions in any of the above titles.