Since the invention of the first GPU in 1999, NVIDIA (NASDAQ: NVDA) has moved beyond PC gaming to become a leading provider of graphics cards and advanced artificial intelligence (AI) solutions. In line with its growth strategy, NVIDIA recently completed two mergers that could enable it to combine world-class CPUs, GPUs, and networking technologies in its products to stay ahead of the competition and multiply its margins.
Merger with Mellanox
In April 2020, NVIDIA paid $ 7.13 billion in CASH to acquire Mellanox, a company that manufactures the switches, adapters and cables needed to build data center networks. Management estimates that this will increase NVIDIA’s total data center market to over $ 60 billion by 2023.
So far, the combined company’s financial performance has exceeded Wall Street’s expectations. In the latest quarter, NVIDIA reported total revenue of $ 4.73 billion, up 57% from the previous year. Mellanox accounted for 13% of that figure, generating $ 615 million in revenue (84% more than the previous year).
Jen-Hsun Huang, NVIDIA’s visionary CEO, believes that the computer of the future will go beyond the server and enter the network. In other words, instead of simply moving data around, the network will help process the data, relieving CPU utilization and making data centers more efficient. This is why this acquisition makes sense. By combining its GPUs with Mellanox networking technology, NVIDIA can take a more holistic approach to the data center by developing proprietary products that Intel and AMD simply cannot match.
But there’s still a missing piece of the puzzle: processors.
In September 2020, NVIDIA announced its intention to acquire ARM from Japanese SoftBank in a $ 40 billion deal.
ARM has built a vast processor ecosystem. Its business model differs from competitors such as Intel and AMD. Rather than building processors, ARM licenses its intellectual property to partners like Qualcomm and Samsung, which make chips, and then pay ARM royalties and royalties for each chip. This business model generates continuous income with high gross margins and has helped make ARM processors the most popular processors in the world, used by more than 70% of the world’s population. But ARM also has another advantage: its processors are more power efficient and more energy efficient than x86 chips made by Intel and AMD. This combination of scale and efficiency will give NVIDIA a significant advantage in a number of markets.
In data centers, the integration of NVIDIA GPUs, Mellanox networking and ARM processors would enable NVIDIA to offer a more complete computing platform designed to address everything from scientific computing to artificial intelligence. This should put NVIDIA one step ahead of all of its competitors and lead to significant revenue growth.
The acquisition will also strengthen NVIDIA’s position in other markets. For example, ARM processors are currently used in 90% of mobile and IoT devices, while NVIDIA chips are virtually non-existent. By acquiring ARM, NVIDIA will gain access to a vast network of customers and developers. By leveraging these links, NVIDIA will be able to market its GPUs alongside ARM processors, generating revenue streams in new markets.
In total, NVIDIA executives estimate that these capabilities will more than double its addressable market (to $ 250 billion by 2023). This figure is more than 16 times higher than NVIDIA’s revenue in the last 12 months, which leaves plenty of room for future growth in the company’s stock. But there is another reason, which should equally interest investors.
Nvidia can use ARM’s expertise and know-how to begin licensing its intellectual property to other companies. This business model has enabled ARM to generate over 90% gross margin. If NVIDIA uses the same approach, it will bring significant additional profit to it.
Unfortunately, in practice everything does not always work out as well as on paper. In any case, investors should look at NVIDIA’s revenue and margin growth. If revenue growth is slowing or margins are shrinking, this could be a sign that things are not going as planned. Investors should also be aware that the ARM acquisition still requires regulatory approval from the UK, China, the European Union and the United States. Any deterioration in relations between these countries could impede approval.
But if everything goes smoothly, then these mergers have every chance to justify the predictions associated with them. NVIDIA GPUs and AI solutions are already globally recognized and consistently stay one step ahead of competing products. The aforementioned mergers would strengthen this competitive advantage while simultaneously increasing the company’s revenues and increasing its operational efficiency. And this, in turn, would not be slow to affect the value of its shares.