Is Nvidia a good investment now?

Nvidia shares soared 11% after a US$40 billion acquisition deal of UK IP provider Arm was announced. Is now a good time to invest in the stock?

  • Nvidia's share price rose over 11% this week

  • The largest US chipmaker announced plans to acquire UK mobile IP provider Arm Ltd for US$40 billion

  • Reactions from foreign media, competitors and analysts have been mixed

  • Nevertheless, the stock outlook remains bullish

Why did Nvidia’s share price rise 11%?

US’ largest chipmaker, Nvidia (NASDAQ: NVDA), has agreed to acquire UK mobile IP provider, Arm Ltd, from SoftBank for a sum of US$40 billion.

The stock and cash deal, if approved by UK authorities, is expected to be immediately accretive to Nvidia’s non-GAAP (adjusted) gross margin and non-GAAP earnings per share.

Arm is the supplier of chip blueprints used in the production of 90% of the world’s smartphones.

Nvidia CEO Jensen Huang stated that the acquisition would create ‘a company fabulously positioned for the age of AI’.

He added that ‘the combination has tremendous benefits for both companies, our customers, and the industry’.

Softbank, meanwhile, will retain an outside interest in Arm via its existing less-than-10% stake in Nvidia.

Shares of Nvidia rose as much as 11% this week, following the announcement.

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What have reactions to the planned acquisition been?

On the contrary, initial reactions from foreign authorities, competitors and industry analysts have been mixed, with some wondering if Arm’s position as a neutral third-party foundational blueprint provider will be compromised.

‘Arm's neutrality would be challenged by clients if Nvidia takes control of the British company. Unlike SoftBank, which acts as an independent party that has no links to the semiconductor industry, Nvidia still has some competition with many of Arm's licensees," Jonah Cheng, chief investment officer at J&J Investment, told the Nikkei Asian Review.

"Many of Arm's clients would not want their confidential chip data to be available for Nvidia, either."

A conflict of interest could also arise with regards to pricing.

A source close to MediaTek told the Japanese news site that there is a possibility that Nvidia could gain access to ‘extremely sensitive information’, including all of Arm’s customers’ chip shipment volume and pricing information.

Meanwhile, an op-ed in China’s state-backed Global Times has called the planned acquisition ‘disturbing’.

‘Given the US-China tensions and U.S. suppression on a range of Chinese technology enterprises, if Arm falls into US hands, Chinese technology companies would certainly be placed at a big disadvantage in the market,’ the column noted, as translated by Reuters.

Nvidia stock outlook: What is the latest?

Despite those initial concerns, the general sentiment for the Nvidia stock is a bullish one.

The stock was rated ‘buy’ by 33 out of 41 analysts polled by Bloomberg, as of 17 September 2020.

It also received an average 12-month share target price of US$554.47, which represents an estimated return potential of 11.2% from the last traded price of US$499.

FDA analyst Hannelore van Twist, who gave a target price of US$662 earlier this week, said Nvidia shares are ‘among the preferred investment choices in the FDA universe’.

While he also noted that Nvidia would be a less neutral vendor of Arm than Softbank, as it also plans to develop new products based on the acquired technology, the company appears committed to continue the open-licensing model.

Furthermore, ‘Nvidia’s efforts could actually help to create more competition to the widely-used technology from Intel, especially in data centre and edge computing, which are large growth markets and where the Arm architecture's energy efficiency could bring benefits’, van Twist added.

Still, there are some risks to FDA’s investment thesis, including lengthy regulatory scrutiny which may cause the deal to break down.

But should it be approved, the downward risks for Nvidia would then be small, mostly in the form of a small break-up fee.

‘If the firm is able to acquire Arm, it can further lift its growth potential, strengthen its position vis-à-vis Intel and grow into a more powerful player in the broader industry,’ van Twist wrote.

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