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Nvidia’s Purchase of Mellanox Makes It a Long-Term Buy - the Charts Say Why

Chinese regulators approved Nvidia's $6.9 billion acquisition of Mellanox. That's great news for long-term investors. The charts say why.

Nvidia  (NVDA) - Get NVIDIA Corporation Report has been trading well from the March lows, roaring back by more than 50% to currently trade a bit below $300 a share.

On Thursday, the Santa Clara, Calif., graphics-chip specialist's shares are up more than 6% on reports that the company has received regulatory clearance from China on its $6.9 billion acquisition of Mellanox  (MLNX) - Get Mellanox Technologies, Ltd. Report.

Investors were worried about the deal clearing regulatory hurdles in China, particularly as trade-war tensions flared throughout 2019. 

That's after Chinese regulators remained mum on the tieup between Qualcomm  (QCOM) - Get QUALCOMM Incorporated Report and NXP Semiconductors  (NXPI) - Get NXP Semiconductors N.V. Report while a timeline for the deal expired.

As a result, It was a reasonable concern to worry that Nvidia and Mellanox would not get the deal done. Lo and behold though, the two are now much closer to aligning - and that’s great news for Nvidia investors.

When the company announced the deal in March 2019, management said it would immediately add to earnings, margins and free cash flow. Nvidia had a tough 2019, as it worked through a cryptocurrency-related overhang from the second half of 2018. 

Now though, demand for its products is strong, the stock has momentum and the addition of Mellanox will be a huge catalyst for long-term investors.

Let’s look at the charts.

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Weekly chart of Nvidia stock. 

Weekly chart of Nvidia stock. 

Here’s the thing. When the deal was announced, both of these stocks rallied. That’s because the synergies were very clear to Wall Street and the deal was an obvious benefit to Nvidia. The company didn’t overpay, while Mellanox would make it a more profitable entity.

For long-term shareholders, that’s music to their ears. But that doesn’t mean the market will care in the short term. With the S&P 500 rallying 30% from its March lows, we could be ripe for a pullback. If that’s the case, Nvidia may be susceptible to selling pressure as well.

Have a look at the weekly chart above. It shows the very orderly rise in Nvidia stock over the course of nearly seven months. 

The shares briefly cleared resistance around $288, but failed to hold this level as support as shares tumbled below uptrend support and eventually below $200. Ultimately, Nvidia bounced off support between $180 to $190 before ripping higher.

Based on the recent price action and news regarding its Mellanox deal, I find it difficult to imagine a retest of the 2020 lows. 

But a dip into the $240-to-$250 area is possible. Should we get a more fierce pullback, a decline toward the $200-to-$210 zone would seem to reflect great value in Nvidia stock for long-term buyers as well.

Nvidia shares can certainly continue higher, but given the environment, buyers will likely have a better risk/reward setup in the future via a correction in the stock price.