Buy NVDA Stock With Nvidia Set To Buy Mellanox To Expand Cloud Business?

Nvidia (NASDAQ:NVDA) shares jumped over 5% in morning trading Monday after the company announced that it will acquire Mellanox (NASDAQ:MLNX) as it tries to expand its data center business in the cloud computing age. The deal, which is valued at $6.9 billion, would be Nvidia’s largest-ever purchase.

Deal

Nvidia and Mellanox announced the proposed deal on Monday that will see NVDA pay $125 a share in cash for the firm that has operations in the U.S. and Israel. The price marked a 14% premium to Mellanox’s closing price Friday of $109.38 a share. Investors should note that Mellanox stock jumped 8.40% to $118.57 a share through morning trading. This means that there might still be some uncertainty about the deal as its shares sit below what Nvidia’s planned purchase valued the company at.

Nvidia said that the deal, which is projected to close by the end of the year, would immediately add to the company’s bottom line and gross margin. The firm has long been a GPU giant, helping drive the rise of life-like graphics in the video game industry. Nvidia has also expanded its datacenter business and its chips are now used to help power cloud infrastructure. Giants such as Amazon (NASDAQ:AMZN) and Google (NASDAQ:GOOGL) both currently use some Nvidia offerings.

The firm’s Mellanox deal is expected to help Nvidia expand its cloud computing and datacenter businesses. Plus, Nvidia reportedly beat out rivals like Intel (NASDAQ:INTC) to make the deal for the company that specializes in chips designed to speed up the flow of information between servers. Mellanox reported $1.09 billion in revenue last year. “The emergence of AI and data science, as well as billions of simultaneous computer users, is fueling skyrocketing demand on the world’s datacenters,” NVDA CEO Jensen Huang said in a statement.

“Addressing this demand will require holistic architectures that connect vast numbers of fast computing nodes over intelligent networking fabrics to form a giant datacenter-scale compute engine.”

Overview

As we alluded to at the top, Nvidia stock has fallen over the last six months as part of the broader semiconductor industry downturn. More specifically, Nvidia, like Advanced Micro Devices (NASDAQ:AMD) and others, experienced lower cryptocurrency-related demand. “Q4 was an extraordinary, unusually turbulent, and disappointing quarter,” CEO Jensen Huang said in a recent statement.

Meanwhile, Micron (NASDAQ:MU) reduced its full-year spending plans on the back of lower-than-expected demand in the historically cyclical semiconductor market. Falling chip prices are also projected to hurt the likes of Micron and others like Western Digital (NASDAQ:WDC) .

Clearly, the broader chip industry looks like it is set to face some significant headwinds. Plus, Nvidia’s impressive run of success makes for some difficult year over year comparisons. Still, NVDA stock is down 35% over the last year and rested at roughly $159.30 a share through morning trading Monday, which marked a 45% downturn from its 52-week high of $292.76 a share.

Outlook

Nvidia is coming off a fourth quarter of fiscal 2019 that saw its revenue fall 24% to $2.21 billion. Despite the huge Q4 pullback, the company’s posted record full-year revenue of $11.72 billion, which represented a 21% surge from the year-ago period. The company also achieved record full-year revenue for all of its key divisions, including gaming and datacenter.

Looking ahead, our current Zacks Consensus Estimate calls for Nvidia’s Q1 fiscal 2020 revenue to tumble 31.4% to reach $2.20 billion. The company’s second-quarter revenue is expected to sink 17% to reach $2.59 billion. Meanwhile, NVDA’s full-year revenue is expected to slip 4.3% to $11.22 billion. With that said, the company is projected to return to top-line growth in fiscal 2021, with revenue expected to come in 19% above our current-year estimate to hit $13.4 billion.

Meanwhile, at the bottom end of the income statement, Nvidia’s adjusted quarterly earnings are projected to collapse 60% to hit $0.82 a share. This negative trend is expected to continue with fiscal 2020’s adjusted earnings expected to fall nearly 20%. Yet, like the firm’s revenue, the company’s bottom-line is projected to surge 37% above our 2020 estimate next year.

Bottom Line

Nvidia is a Zacks Rank #5 (Strong Sell) at the moment based on its negative earnings trend. With that said, we can see that the company has seen some positive bottom-line revision activity recently, and this recent uptick could be a sign of more positivity down the road—especially if analysts come to like the company’s Mellanox deal.

Nonetheless, the near-term looks rough for Nvidia as it faces a potential downturn throughout fiscal 2020. And NVDA is trading at 32X forward 12-month Zacks Consensus EPS estimates at the moment despite its downturn. This represents a significant premium to its industry’s 12.6X average and the S&P 500’s 16.5X. Therefore, investors might want to pay attention to NVDA for now as the company faces some uncertainty at the moment, but is likely poised for a comeback at some point.

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