Semiconductor sector climbs after Nvidia announces acquisition of Mellanox

A recent slowdown in data-center spending has had tech investors concerned. The Philadelphia Semiconductor Index (SOX) fell 7% in 2018 after gains of more than 35% in 2016 and 2017. The index has bounced back 14% year to date, but it’s still down 10% from its 52-week high.

Nvdia’s willingness to open up its check book, and outbid other companies, is a sign that corporate executives believe the worst of the sales weakness is behind them. A number of media reports have said Intel was also interested in acquiring Mellanox.

The back story. Cloud computing, artificial intelligence and data center connectivity are big trends in tech these days. That techno-speak just means that businesses are moving computing operations off corporate networks and into giant, ultrafast data centers. Mellanox makes products that go into those centers to facilitate data transmission between servers, storage systems, and communications-infrastructure equipment.

What’s new: The acquisition strengthens Nvdia’s position in the business. Currently, about 25% of Nvdia’s sales go into data centers.

” Intel was outbid by Nvidia on Mellanox,” New Street Research tech analyst Pierre Ferragu tells Barron’s. He believes the deal makes sense for Nvida, saying “Intel doesn’t need the asset as much as Nvidia.”

Looking ahead. This deal heats up the competition between Nvidia and Intel, which also has a significant business in data-center computing. Nvidia is paying about 20 times earnings for Mellanox. The 13% premium may seem small, but Mellanox already hit a 52-week high last week. The deal could boost share prices of other server-chip companies like Microchip Technology(MCHP) and Xilinx (XLNX).

When bad economic news weighs on stocks–as it has in recent weeks–it’s good to remember that there are a variety of buyers, including other businesses, in the market. It’s helpful to take notice when they see value in the marketplace.