Nvidia’s (NVDA, $163.31) surprising acquisition of Mellanox (MLNX, $118.07)

Analysts are still trying to figure out what Nvidia Corporation’s $6.9 billion acquisition of Mellanox Technologies Ltd. could mean for the long term, as the two companies’ businesses overlap very little.

Nvidia is famous for its state-of-the-art graphics oriented chips. Over the years, it has seen an upsurge of its usage and relevance across new workloads, especially in data center markets including applications in high-performance computing and artificial intelligence.

Mellanox, on the other hand, specializes in networking chip and card making and has very little to do with actual computing. It is unclear what the combination of the two could mean in terms of revenue as both technologies already work side by side on the same servers used in high workloads.

Analysts argue that Mellanox’s $1.1 billion revenue will not be transformational for Nvidia. But Mellanox's 24.8% operating margin under Nvidia’s control might help improve the operating margins to more than 30%.  Nvidia’s gross margins in 2018 came in at 69.2%. As such, the deal should be accretive to Nvidia within the first year given the attractive metrics.

Even though there is no product overlap between the two companies, the acquisition could be seen as Nvidia’s attempt to diversify its offerings and improve its competitive standing against other large data centers and networking rivals. Nvidia’s focus on AI could be a potential competition to China’s growing interest in the field.

Overall, Nvidia’s acquisition of Mellanox seems like a long-term bet that computing and networking will one day come together.

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