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NVIDIA Sparks Rumors to Beat Rivals in Mellanox Buyout Race

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Per Israeli newspaper Calcalist’s recent report, NVIDIA (NVDA - Free Report) is in talks to acquire fabless semiconductor firm Mellanox Technologies (MLNX - Free Report) .

Further, Reuters estimates this deal to be valued at around $7 billion in cash, details of which are expected to be confirmed soon.

The chip giant has reportedly outbid Intel (INTC - Free Report) , Microsoft (MSFT - Free Report) and Xilinx in the auction of Mellanox. Intel reportedly bid $6 billion for Mellanox in January 2019 but current reports claim NVIDIA to have offered 10% more.

According to Reuters, this biggest-ever acquisition by NVIDIA would help the company boost its business of chip making for datacenters, thereby reducing its heavy dependence on the gaming industry.

Why Mellanox

Mellanox with a current market cap of $5.93 billion provides interconnect products and solutions based on the Ethernet and InfiniBand technologies. Its customers include datacenter owners and also the companies, which build datacenter. Notable clients include Alibaba, JD.com, Dell and Hewlett Packard Enterprise.

In 2018, Mellanox’s revenues of $1.088 billion grew 26% year over year. While Ethernet’s soared 54% to approximately $618 million, InfiniBand’s increased 8% year over year to $438 million.

Mellanox is benefiting from solid demand for its Gigabit EDR solutions in machine learning, artificial intelligence, high-performance computing, database, storage and more. Further, robust demand for Mellanox’s InfiniBand solutions is a key catalyst.

The company is one of the major suppliers of 25, 40, 50 and 100GB Ethernet adapters, switches and cables to the market today. In fact, per Crehan research estimates, Mellanox had a market share of 69% in the high-speed Ethernet adapter business during third-quarter 2018, leaving Intel, Broadcom and other peers trailing.

What it Means for NVIDIA

Having impressed investors with a stellar performance in the last couple of years, NVIDIA has been witnessing a downward trend since last October, thanks to a slowdown in its gaming segment.

Post the crypto mining bubble burst, NVIDIA was overly optimistic that demand for its GPUs will shift from crypto miners to gamers, which will boost its gaming business revenues and offset the revenue loss from miners. However, contrary to its belief, demand from gamers failed to grow rapidly to compensate the soft cryptocurrency-related requirement, taking a severe toll on the company.

The company’s focus on branching out its operations in other markets is therefore prudent in our view. According to NVIDIA, its High-Performance Computing (HPC) and datacenters are expected to witness tremendous growth over the long haul.

The acquisition of Israel-based Mellanox would thus help NVIDIA consolidate its datacenter business. Notably, for the past nine years, the company has been active in Israel by either selling its processors locally or buying stakes in startups or setting up a research and development unit.

NVIDIA opened an R&D center in Israel during 2017 that currently employs 20-30 people. The company announced last October that it plans to launch a new research center in Tel Aviv, which will focus on AI.

NVIDIA currently carries a Zacks Rank #5 (Strong Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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