NVIDIA Corp. Liquidity Assessment Revised To Adequate From Exceptional; Ratings And Outlook Affirmed

  • NVIDIA Corp. has announced an agreement to acquire Mellanox, a semiconductor firm focused on interconnect and data transfer technology, in a $6.9 billion all-cash transaction.
  • We expect this transaction, which the firm expects to close by the end of fiscal 2020, will lower cash balances to approximately $1.5 billion, including the impact of the firm's $2.3 billion shareholder return plan.
  • We are revising our liquidity assessment on NVIDIA to adequate from exceptional, reflecting significantly lower cash balances.
  • At the same time, we are affirming all ratings on the firm, including our 'BBB+' issuer credit rating, based on our view that S&P Global Ratings-adjusted leverage will remain below 0.5x and that the contribution of Mellanox will accelerate the firm's increasing end-market diversity.
  • The positive outlook reflects S&P Global Ratings' view that NVIDIA's sustainable competitive advantages and leading positions in rapidly growing end markets will support further revenue growth and business diversification, even as revenues will remain somewhat volatile.
NEW YORK (S&P Global Ratings) March 12, 2019—S&P Global Ratings today took the 
rating actions listed above. Our affirmation is based on our view that Santa 
Clara-Calif.-based NVIDIA's pro forma net leverage for fiscal 2020 will rise 
modestly but peak at under 0.5x in fiscal 2020, in spite of the $6.9 billion 
purchase price of Mellanox, combined with $2.3 billion of expected shareholder 
returns over the course of fiscal 2020, depleting much of the firm's $7.4 
billion cash balance. The combination strengthens NVIDIA's business by 
providing incremental product diversity to a company that has been 
historically dependent on graphics processing units (GPU) for the overwhelming 
majority of revenues, and improves the firm's position in the data center 
sector. Mellanox's interconnect products complement NVIDIA's offerings in 
high-performance consulting, particularly as compute workloads are 
increasingly distributed across multiple servers, and should bolster revenue 
growth in data centers, reducing exposure to volatile gaming markets. 
Management said that it isn't seeking significant cost synergies from this 
transaction, and we believe that there is low risk of business disruption.

The positive outlook reflects S&P Global Ratings' view that NVIDIA's 
sustainable competitive advantages and leading positions in rapidly expanding 
end markets will support long-term revenue growth and business 
diversification, even as top-line growth slows somewhat over the next year. We 
expect NVIDIA to maintain leverage under 0.5x in spite of lower cash balances 
through considerable free cash flow generation. We believe that shareholder 
returns will broadly increase in line with cash generation after fiscal 2020.

We would consider an upgrade over the next 12 months if NVIDIA continues to 
diversify its end-market exposure through strong growth in data center, deep 
learning, and automotive applications for its technology. We would also look 
to conservative financial policy and limited further mergers and acquisitions 
(M&A) as conditions for a higher rating.

We could revise our outlook to stable if the company's substantially 
above-industry growth rate declines due to a substantial and sustained 
downturn in gaming markets, a diminishment of NVIDIA's current technological 
lead over its primary competitor, or slowing traction in data center 
acceleration markets. We also could consider lowering the rating if NVIDIA 
adopts a more aggressive financial policy, leading to leverage sustained over 
1.5x.
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