Nvidia’s $6.9 billion acquisition and the “unreliable” demand in the mining industry

Since last year, cryptocurrency has entered a bear market, which has squeezed the profit margins of the mining industry and reduced the demand for GPUs in the mining circle, which in turn affected the revenue of GPU manufacturers.

According to Nvidia's latest financial report, the "data center business" to which GPU belongs had revenue of $679 million in Q4 2018, which was lower than the expected $839 million. This also confirmed Nvidia's prediction in early 2018: "Our focus remains on the core market, as the cryptocurrency market may be unstable."

Revenues of all business lines are declining

Although the specific proportion of revenue from GPUs sold to the mining community in the "data center business" has not been made public, for Nvidia, the revenue related to digital currencies is more like "God's gift", so what is more "reliable"?

On March 11, Nvidia reached an agreement to acquire Mellanox Technologies Ltd., an Israeli chip company, for a total price of US$6.9 billion. Mellanox Technologies Ltd. is a chip company that mainly produces hardware such as chips required for high-speed networks and provides software solutions. The transaction has been approved by the boards of directors of both companies and is expected to be completed by the end of 2019. The US$6.9 billion is also the largest figure in Nvidia's M&A history.

The huge acquisition of Mellanox is believed to help boost its own data center chip production business, thereby improving the overall efficiency of data centers (including AI, high-performance computing, etc.). Will this move also reduce the impact of cryptocurrency prices on upstream chip manufacturers?

Nvidia's bumpy road

The founding and rise of Nvidia was accompanied by the tit-for-tat between Intel and AMD. From the eight-year protracted litigation to the subsequent fierce battle, the "little transparent" Nvidia completed its gorgeous transformation.

This veteran chip company was founded in 1993 with the original intention of developing a dedicated chip to speed up the rendering of 3D images in video games and bring more realistic display effects.

When it was founded, Intel and AMD, the industry's largest and second largest companies at the time, were in the midst of an eight-year litigation war that ended in 1995.

In the same year, NVIDIA launched the first multimedia accelerator for game consoles. This graphics processor, called NV1, integrated graphics processing, sound card, game joystick and other functions. After its release, it was favored by Sega, the largest game manufacturer at the time.

Subsequently, AMD, which won the lawsuit but suffered a technical loss, was determined to compete with Intel in technology. As a result, from 1997 to 2005, the semiconductor market saw a rapid iteration phenomenon of direct technological impact between AMD and Intel.

At the same time, NVIDIA, as a startup company, was gradually beginning to seize the market without any disputes.

In 1996, after three years of exploration, NVIDIA began to shift its focus to the more segmented graphics processor market and ushered in four years of smooth sailing.

In 1999, the company's revenue exceeded $150 million and was successfully listed on the NASDAQ. In May of the same year, its graphics processor sales exceeded 10 million. In August, it creatively proposed the GPU concept for the first time and launched the GeForce 256, the first display core named GeForce.

In 2000, NVIDIA completed its first acquisition, acquiring 3Dfx, the largest graphics processor manufacturer in the mid-1990s, for US$70 million in cash and 1 million shares of the company's stock. It bid farewell to its "insignificant" status and officially became the industry leader.

At that time, in the graphics processing and 3D technology industry, only ATI could compete.

In the following years, Nvidia was not as successful as before.

In order to enter the game console industry, Microsoft cooperated with Nvidia and asked them to develop Xbox graphics chips, SoundStorm sound chips and motherboard solutions. Because Microsoft failed to complete the Xbox graphics chip order as scheduled, Microsoft turned to cooperate with Nvidia's competitor ATI; the flagship product Geforce series was repeatedly exposed to quality accidents, with problems of over-temperature operation and multiple spontaneous combustion and explosion accidents. The founder Huang Renxun was once ridiculed by game players as the "two bomb hero", etc. These all impacted Nvidia's market, and Nvidia's revenue decreased in 2013.

Under multiple blows, Nvidia was forced to reach a patent cross-licensing agreement with Intel.

In 2004, NVIDIA began to think about a longer-term problem: how to make GPU technology that only does 3D rendering universal?

The turning point came in 2006 when it launched the CUDA (Compute Unified Device Architecture) ecosystem. Developers could now write code in their native programming language (C or C++), and NVIDIA could match their software with the GPU hardware, allowing the hardware to run instructions more efficiently. Anything that relied on image or video processing could be adapted to NVIDIA's GPU and render massive amounts of data.

Nvidia first introduced the concept of GPU in GeForce 256

In the same year, AMD acquired ATI, Nvidia's strong competitor in GPU, and Intel also terminated its cooperation with Nvidia and stopped cross-patent sharing. Since then, AMD and Intel have become competitors, and Nvidia has been squeezed by the giants.

In recent years, emerging industries represented by artificial intelligence (AI), big data, cloud computing, and the Internet of Things have risen rapidly, and Nvidia has finally made it to its own era. Tesla, a massively parallel computing chip based on the CUDA architecture, was born for the AI ​​era and has brought sustained profit growth to the company. From 2015 to 2018, the company's revenue and operating profit margin doubled. Its stock soared nearly 10 times during the same period.

From its founding to its development, NVIDIA has experienced many ups and downs, but has achieved remarkable results.

Nvidia's business revenue

Since its establishment, NVIDIA has launched a variety of chip products including GPU, CPU, motherboard chipset, etc. After continuous development and iteration, there are currently two main categories: GPU and Tegra processor. The two categories of products are divided into 7 series, serving the four major markets of games, professional visualization, data centers, and automobiles. In addition, OEM and patent licensing also contribute part of the company's revenue.

NVIDIA was originally founded to serve gaming, and gaming has always been its main source of revenue, accounting for more than 50% since Q4 of fiscal year 2015, with an annual growth rate of more than 30%.

After NVIDIA released the CUDA programming toolkit in 2006, it used its outstanding artificial intelligence chips to provide underlying computing support for deep learning and began to transform from a graphics chip company to a world-leading GPU computing technology provider.

The development of GPUs has brought in revenue from data centers. According to the latest financial report, data center business accounts for one-third of Nvidia's revenue. In fiscal 2017, Nvidia's data center business sales increased by 2.45 times to $830 million. In fiscal 2018, sales of the business increased by $1.93 billion, an increase of 2.33 times compared to fiscal 2017, with a slight slowdown in growth.

The development of deep learning means the arrival of the GPU era, and the development of cryptocurrency and the frenzy of mining demand have further driven the market demand for GPUs.

In January 2019, NVIDIA announced its financial guidance for the fourth quarter of fiscal year 2019 ending January 31 this year, predicting that revenue for the quarter will drop from the previous estimate of 2.7 billion to 2.2 billion US dollars.

Huang Renxun believes that the reason is China's stabilizing economic situation. 40% of Nvidia's gaming business comes from emerging markets such as China.

On December 13, 2017, the price of Bitcoin reached an all-time high of $17,132.11. In the following year, the Bitcoin market suffered a setback, with its price decreasing by more than 80%. On November 21, 2018, it fell below $4,100, hitting a new low since 2017. The sharp drop in Bitcoin in November forced some small and medium-sized mines to sell their mining machines to clear their positions, and some even sold them by the pound at the price of scrap metal. With the advent of the bear market, the mining business was hit hard, which also affected Nvidia's data center revenue to a certain extent.

Nvidia GPU Miner

In early 2018, Nvidia first acknowledged the benefits of mining, which helped the company's financial report exceed expectations. Colette Kress, executive vice president and chief financial officer of Nvidia, said in a conference call: "The strong demand in the cryptocurrency market exceeded our expectations. Although the proportion of revenue is difficult to quantify, it is certain that the proportion of revenue in the cryptocurrency market is higher than in the previous quarter." However, Nvidia does not count on this market. Kress said: "Our focus remains on the core market because the cryptocurrency market may be unstable."

As early as last year, in the first quarter of fiscal year 2018, Nvidia's revenue from digital currency mining business reached 289 million US dollars, but in the second quarter, the business fell to 100 million US dollars. Nvidia had already noticed the risks of the digital currency business at that time, and announced the termination of investment in this business in August last year due to low profits.

A huge investment to achieve a breakthrough

Nvidia confirmed the acquisition of Mellanox on the 11th, with the final price being US$6.9 billion.

Mellanox Technologies was founded in 1999 and provides data interconnect solutions with extremely high throughput and extremely low latency for supercomputers. Its specific products include switches, software, cables, chips, cloud computing, data storage, and financial services. Nvidia introduced that Mellanox pioneered the InfiniBand interconnect technology, which, together with its high-speed Ethernet products, is used in more than half of the world's fastest supercomputers and many leading hyperscale data centers. With Mellanox, Nvidia will optimize the entire computing network and storage data center scale, thereby providing customers with higher performance, higher utilization, and lower operating costs.

“The data center is more important than ever,” Huang said in an interview. “This combination allows us to innovate faster.”

Huang Renxun said: "Data centers have become the most important computers in the world. Computers are no longer limited to servers. In the future, computers will extend to the network. What we hope to do is to extend computers from today's servers to the entire data center in the future."

Stacy Rasgon, an analyst at research firm Benstein, said: "Nvidia is extending its network and connectivity business, hoping to provide customers with their own customized solutions. The acquisition of Mellanox will give Nvidia more network capabilities."

Huang Renxun told the media after the acquisition was announced: "We rarely do M&A transactions because we prefer to build 'new businesses' ourselves." According to publicly disclosed information, the acquisition of Icera for $367 million in 2011 was the largest acquisition before that. The acquisition of Mellanox at a premium of 14% at $125 per share also reflects Nvidia's determination to develop its data center business to a certain extent.

"This could reinvigorate M&A across the industry. Given the size of the company, this deal would be a positive, but we would not view it as transformational," RBC Capital Markets analyst Mitch Steves wrote in a note. "This deal would have a larger impact on the semiconductor industry as a whole."

Earlier news said that Intel also joined the Mellanox acquisition activities, but Huang Renxun said he did not know who the competitors were.

After the announcement, Nvidia's stock price rose 7% in after-hours trading on Monday, while Mellanox's stock price rose nearly 8%.

References

Intel, AMD, Nvidia: 50-year history of the Three Kingdoms in the chip industry

Behind NVIDIA's glory: past, present and future (Part 1)

Behind NVIDIA's glory: past, present and future (Part 2)

How did Nvidia become one of the hottest stocks in tech?