Why NVIDIA Bought Mellanox

Technology is an amazing thing, and it’s been wonderful to watch it evolve. Really think about that for a moment. It was over 100 years ago when the first computer was invented. Today, we have computers thinking on their own with the help of artificial intelligence (AI). To be clear, though, we’re still a long way away from robots taking over the world!

Data centers, which are facilities that centralize an organization’s IT operations and equipment, are now playing big roles in artificial intelligence. They can provide the “home” for the artificial intelligence systems. There’s a lot of growth potential here, as Grand View Research expects the global data center power market to hit $10.77 billion by 2025.

Given the growth potential here, it was no surprise that NVIDIA (NVDA), which is on the frontlines of artificial intelligence, decided to invest heavily in this space. And it did this by announcing on Monday that it plans to acquire Mellanox Technologies (MLNX) for a whopping $6.9 billion.

Founded in 1999 in Israel, Mellanox Technologies started with the goal of producing semiconductors for data center infrastructure. Mellanox began by developing the Next Generation I/O (NGIO) standard, which was quickly combined with Future I/O standards and eventually renamed “InfiniBand.” And back in 2005, the company achieved more than 500,000 InfiniBand port sales, and was the first company to ship DDR 20Gb/s InfiniBand adapters and switch silicon.

Over the next 13 years, Mellanox Technologies experienced a lot of firsts. HP became a top customer in 2006, thanks to the company’s c-class BladeSystem. In 2009, Mellanox introduced Microsoft Logo qualified InfiniBand Adapters for Windows HPC Server 2008. And in 2010, the company started selling its own switch systems under the IS5000 brand.

Today, Mellanox Technologies provides end-to-end Ethernet and Infiniband solutions for servers and storage, which help enhance data centers’ performance. The company offers a range of products, including cables, network adapters, processors, silicon, software and switches. Mellanox is the second-largest supplier of Ethernet adapters and has a 60% market share in the 25G and above market.

In the most recent quarter, the company reported a record fourth-quarter and full-year 2018 earnings report. For the fourth quarter, Mellanox Technologies reported 22.1% annual revenue growth, or $290.1 million. Earnings per share surged 73.2% year-over-year to $1.42, topping estimates for $1.30 per share by 9.2%.

For fiscal year 2018, Mellanox Technologies revealed earnings of $2.28 per share on $1.09 billion in revenue. That translates to 26% annual revenue growth and 119.7% annual earnings growth. Company management noted that it expects to “carry this momentum into 2019 and deliver another year of healthy, double-digit revenue growth.”

Clearly, Mellanox Technologies is a great company, which is why I recommended it last year in my Accelerated Profits service. Given the innovating products and financial health of the company, it’s no surprise why NVIDIA decided to buy it, too.

Under the terms of the agreement, NVIDIA will purchase all of MLNX’s issued and outstanding shares for $125 per share, or a total of $6.9 billion. That represents a 15% premium to MLNX’s closing price on March 8. NVIDIA expects the deal to be immediately accretive to its earnings.

Together, NVDA and MLNX will offer a superior networking and computing platform that will likely play a key role in the future of artificial intelligence and data science.

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