Nvidia tangos with an activist hedge fund: An excerpt from Tae Kim's new book on the tech giant

Core Insights - Nvidia faced shareholder dissatisfaction in early 2013 due to stagnant stock prices and mixed financial performance, with a 7% year-over-year sales increase but a 2% decline in earnings [2] - Starboard Value identified Nvidia as undervalued, acquiring a 4.4 million share stake worth approximately $62 million, believing the company's core assets had significant growth potential [3] - Nvidia's strong balance sheet, with about $3 billion in net cash against an $8 billion market value, contributed to Starboard's view of the company's undervaluation [3] Relationship with Starboard Value - Initial concerns existed among Nvidia executives regarding Starboard's influence, fearing potential reorganization and cuts to investments in key projects like CUDA [4] - Despite initial tensions, the relationship remained constructive, with Starboard advocating for a $1 billion stock buyback program, which Nvidia eventually implemented [5][6] - Starboard exited its investment by March 2014 after Nvidia's stock price increased by about 20% following the buyback announcements [5] Mellanox Acquisition - Mellanox, a leader in high-speed networking products, was struggling with thin profit margins despite revenue growth from $500 million in 2012 to $858 million in 2016 [8] - Starboard acquired an 11% stake in Mellanox in January 2017, criticizing its management for poor performance, leading to a compromise that included board appointments [9] - In September 2018, Mellanox received a nonbinding purchase offer, prompting Nvidia to enter a competitive bidding process, ultimately acquiring Mellanox for $6.9 billion in March 2019 [11][13] Strategic Importance of Mellanox - Jensen Huang emphasized the strategic necessity of Mellanox for Nvidia, highlighting the growing demand for high-performance computing and the need for advanced networking technology [15] - The acquisition proved beneficial, with the former Mellanox business generating $3.2 billion in quarterly revenue by May 2024, significantly increasing from its previous public company performance [17] - Nvidia's ability to execute post-acquisition was crucial, with Mellanox's technology playing a vital role in enhancing Nvidia's dominance in the AI sector [19] Historical Perspective - The acquisition of Mellanox is regarded as one of the best in Nvidia's history, with significant contributions to data-center-scale computing and networking capabilities [20] - Starboard's Jeff Smith reflected on the investment, suggesting that exiting the position was a missed opportunity [21]