Nvidia sets path to become a data-center company

Nvidia sets path for the future

Earlier this month, Nvidia made its largest acquisition ever with a $6.9 billion purchase of networking equipment manufacturer Mellanox Technologies.

Mellanox, a Sunnyvale, California company formerly based in Israel, received multibillion-dollar offers from the likes of Microsoft and Intel. Nvidia beat out both tech giants and sealed the deal with a surprise $6.9 billion bid.

Nvidia’s acquisition of Mellanox, a supplier to all the major cloud services’ equipment systems, suggests the chip maker is taking on a vertically integrated approach to its business.

Nvidia the Server Company

Nvidia’s impressive growth in recent years was largely thanks to the rise of cryptocurrency. But when cryptocurrency chip demand collapsed, the company wasn’t hit hard because its data center business overperformed. Similarly, the corporation’s core business of selling high-end GPUs allowed it to weather declining semiconductor sales in the Chinese market.

In both cases, to a significant extent, luck played a key role.

Nvidia’s buyout price of Mellanox for $125 per share was about 14 percent more than Mellanox’s market cap—a respectable premium. The Santa Clara, California-based firm put its money where its mouth is by making a decisive move to diversify.

In a press release, Nvidia mentioned plans to expand its market share in the networking space.

“The acquisition will unite two of the world’s leading companies in high performance computing (HPC). Together, Nvidia’s computing platform and Mellanox’s interconnects power over 250 of the world’s TOP500 supercomputers and have as customers every major cloud service provider and computer maker.”

The Benefits of Vertical Integration

Nvidia’s purchase of Mellanox vertically integrates the company. Vertical integration refers to a company that owns a stake in the downstream and upstream of its supply chain.

Jensen Huang, Nvidia’s chief executive, spoke in a conference call about the deal. Huang said the company expects to first work in advanced computing with its new acquisition’s technology. In time, he expects Nvidia to mature into a broader role.

“I’ve believed for a very long time that Nvidia would go from a chip-level company to a server-level company to essentially a data center-scale company.”

In the face of an increasingly consolidated semiconductor industry, Nvidia hopes to be ahead of the next big trend, just like it was with cryptocurrency.

In a recent interview, Huang said Nvidia’s investors were wary of the Mellanox acquisition. But as the firm’s stock price rose by 15 percent following the purchase announcement, it’s reasonable to assume a lot of nerves have been settled.