It took a year and a month, but NVIDIA's (NASDAQ:NVDA) proposed purchase of Mellanox Technologies (NASDAQ:MLNX) has cleared its final hurdle. Though there had been plenty of speculation that China might nix the transaction due to its now-forgotten trade war with the U.S., NVIDIA announced on April 16 that it had received the go-ahead to proceed from Chinese regulators.

The company expects the deal to close by April 27, and Mellanox shareholders will finally receive their $125 per share cash-out.  

It's good news for NVIDIA shareholders too. Though a lot has changed in the world since March 2019, the data center end market and the cloud computing services it supports are more important than ever before. And Mellanox, a manufacturer of computer networking hardware, will be an even more valuable asset now than when the potential deal was formally announced, as is NVIDIA's own data center business. This is yet another reason to keep the stock as a core portfolio holding for the decade ahead.

A picture of a cloud surrounded by computers, illustrating a data center.

Image source: Getty Images.

What NVIDIA is actually buying

In the 13 months since NVIDIA originally pinned a $6.9 billion price tag on the Israel-based network switching and interconnectivity hardware maker, Mellanox continued to operate independently. And it has done quite well.

Over that time, Mellanox has grown the top and bottom lines by double digits: Revenue increased 22% in 2019 to $1.33 billion, and adjusted net income grew 48% to $394 million. And in March, it purchased privately-held Titan IC for an undisclosed (which typically means small) sum, adding that company's network hardware accelerator platform to its portfolio. 

At $6.9 billion, NVIDIA is taking over Mellanox at an attractive 17.5 times adjusted net income -- a bargain, really, if it keeps expanding at the rate it has been under its new parent's umbrella. And there's a good chance that will happen. 

While NVIDIA's high-end graphics processing units (GPUs) first made their mark powering video game graphics, they soon proved popular for many other uses. GPUs are now widely used in the training and deployment of artificial intelligence systems, for example. They also were purchased heavily by cryptocurrency miners, though that market has shrunk significantly.

And in the most dramatic example of its growth beyond the gaming industry, in NVIDIA's most recently reported quarter, the data center segment accounted for nearly a third of total revenue. Based on NVIDIA's data center revenue last year of $2.98 billion, adding Mellanox to the mix will boost the segment by nearly another 50%.  

To the cloud and beyond

It's easy to see how Mellanox will immediately contribute to NVIDIA's bottom line. Mellanox's adjusted net income margin of 30% last year was exceptionally good, and NVIDIA won't have to take on any new liabilities to complete the $6.9 billion transaction (though it could choose to). The company had $10.90 billion in cash and equivalents on the books at the end of fiscal 2020 and only $1.99 billion in long-term debt. Even with the cloudy economic outlook that now prevails due to the coronavirus pandemic, the GPU designer should have ample liquidity to make its purchase, weather any short-term disruption to its operations, and continue to invest in further GPU innovation.  

After factoring Mellanox's results into the mix, NVIDIA stock trades for 45 times last year's adjusted net income as of this writing. That is by no means cheap, but bear in mind that in 2019, NVIDIA was still in the midst of a sales renormalization after the cryptocurrency boom collapsed in late 2018. Given the potential for its technology over the next decade to power data centers, edge network computing, AI, and more, the GPU design leader remains one of my core portfolio holdings.