MELLANOX, THE CORNERSTONE OF NVIDIA-MICROSOFT REVENUES ROUND-TRIPPING SCHEME

February 22, 2013 case number 1:2013cv01225 US District Court for the Southern District of New York Plaintiff Valentin Petrov Defendant Mellanox Technologies, Ltd. (link).

“The Exchange Act claims allege that Defendants engaged in a fraudulent scheme to artificially inflate the Company’s stock price. As a result of the fraud described below, the Company has lost a substantial portion of its value.”

“During the Class Period, Defendants made false and/or misleading statements, as well as failed to disclose material adverse facts concerning Mellanox’s business, operations, and prospects. Specifically, Defendants made false and misleading statements and failed to disclose that the temporary increase in sales of Mellanox’s InfiniBand products was induced by a one-time server processor refresh cycle and would be unsustainable.”

Alright, what the heck is all of this, you might ask yourself? And what does this have to do with #Nvidia? On the 11th of March 2019, Nvidia announced it would acquire Mellanox for $6.9bn (NVIDIA to Acquire Mellanox for $6.9 Billion). At that time, many raised eyebrows about this acquisition mainly for 3 reasons:

• The two companies were operating in two business lines that had very little in common. One was providing infrastructure for HPC while the other was in the business of selling GPUs that were just a marginal component of Mellanox’s infrastructure stack (while CPUs were the critical component).
• The company was trading at a $2.2bn Market Cap when its activist investor started to actively look for a suitor to buy the whole business, and Nvidia ended up paying $6.9bn to buy it, more than $1bn higher than what Intel was offering (and with which at that time the merger made sense).
• Nvidia paid the acquisition all in cash, emptying its coffers almost completely at a time when its revenues were taking a serious hit after the 2018 crypto bust and the collapse in GPU demand from crypto miners.

Basically, in 2019 Jensen Huang was going all-in on the AI narrative, and their idea was to use Mellanox technology to connect multiple GPUs and build super data centers that would allow the experimental OpenAI ChatGPT and Google Bard projects to scale and become commercially viable: “The strategy is doubling down on datacenters, and we are combining and uniting two leaders in high performance computing technologies. We are focused on accelerated computing for high performance computing, and Mellanox is focused on networking and storage for high performance computing, and we have combined the two companies under one roof. Our vision is that datacenters are the most important computers in the world today, and that in the future, as workloads continue to change – which is really triggered by artificial intelligence and data analytics – that future datacenters of all kinds will be built like high performance computers.”

On the 22nd of July 2019, a few months after Nvidia announced its acquisition of Mellanox, this news made headlines: “OpenAI forms exclusive computing partnership with Microsoft to build new Azure AI supercomputing technologies”.

One month ago, I wrote the article “WHAT IF NVIDIA SIMPLY TAGGED ALONG WITH A MICROSOFT AZURE SCAM PLAYBOOK?” and if you include the Mellanox piece of the puzzle along with the fact Microsoft is now surfacing as the single largest customer of Nvidia (A single customer made up 19% of Nvidia’s revenue last year. UBS thinks it’s Microsoft), the picture is now complete.

We already know that Nvidia got in trouble and ultimately got fined by the SEC for misleading its sales expectations in 2018 (SEC Charges NVIDIA Corporation with Inadequate Disclosures about Impact of Cryptomining)… wait a second… let’s have a look again at what I shared at the very beginning of this article:

“During the Class Period, Defendants made false and/or misleading statements, as well as failed to disclose material adverse facts concerning Mellanox’s business, operations, and prospects. Specifically, Defendants made false and misleading statements and failed to disclose that the temporary increase in sales of Mellanox’s InfiniBand products was induced by a one-time server processor refresh cycle and would be unsustainable.”

Do you see what I am seeing here? Yes, 10 years later Mellanox, today part of Nvidia, and #Microsoft are doing the exact same thing. However, in order to make sure the house of cards does not collapse, both companies this time are replicating the same trick many times to make sure the round-tripping does not stop. How are they doing it? Very simple, they keep investing in Startup companies at inflated prices with the requirement those operate on the Mellanox-Nvidia infrastructure Azure is being built upon (Microsoft, Nvidia Lead In Investing In AI Startups, But Others Close Behind). How can these companies pay for Microsoft Azure if they can barely generate revenues and have limited cash resources? A good chunk of Microsoft investments is in reality Azure Credits (OpenAI has received just a fraction of Microsoft’s $10 billion investment).

At this point, it should not come as a surprise anymore that in 2019 Jensen Huang went “all-in” spending all Nvidia cash to buy Mellanox. By now, it is clear there was already a plan in place to profit handsomely from that acquisition with Nvidia Datacenter (that is effectively the Mellanox business) making most of the revenues of its company today. The problem is, that those revenues aren’t real ones.