Nvidia (NASDAQ: NVDA) hit a $20 billion market cap in 2016, today however, that figure is currently sitting at just over $300 billion. With an ever-expanding eye for technology, a knack for diversifying its business, as well as its deepening pockets, this semiconductor titan just announced a deal to buy Arm Holdings off Softbank for $40 billion.
Arm produces the beating heart of each smartphone we buy today. Its CPU technology powers all smartphones, in addition to numerous other devices. With over 180 billion chips being shipped all over the world, this semiconductor company could become the best acquisition that Nvidia will ever make.
What has Nvidia been up to?
Nvidia is definitely becoming one of the best stocks of 2020. It has had record growth in income and revenue with its Q2 earnings showing $3.87 billion in revenue — which is a 50% increase year-over-year (YoY). Whilst its gaming revenue grew 26% YoY, the revenue from its data centers far surpassed its gaming sector with a 167% increase YoY at $1.75 billion.
The data side of its business reached $1 billion this year, back in Q1. This included the sales of its GPU chips which are an essential component for AI systems and machine learning. This represents a rather important break away from gaming as its main revenue stream, which can be unpredictable and volatile at times.
With the likelihood of working from home continuing into the future, many more companies will be looking to increase their online presence and data storage. In this case, Nvidia is perfectly positioned at the forefront of this continued growth in data storage solutions needed by a modern world.
Being a tech giant does come with competition and Nvidia has a continued and growing rivalry with both Advanced Micro Device and Intel. This competition is most prevalent in the gaming segment of its operations with Nvidia and AMD both recently releasing rival gaming cards, whilst Intel just announced a new version of their own Xe series is on the way.
To acquire Arm holdings Nvidia will fork out $21.5 billion in stock and $12 billion in cash, plus a further $5 billion should Arm reach a few financial targets. Of course, there are some critics who believe this is too much to pay for a company which only brings in $1.4 billion in annual revenue, particularly as the deal will be the largest ever for a semiconductor company. Yet, this acquisition demonstrates how successful a company Nvidia has become over the past 5 years or so.
Arm is being purchased from Softbank, who acquired the UK-based company in 2016, paying $30 billion in a deal that consequently made its stock plunge at the time. Now, in the midst of its current internal power struggle, Arm is one of its assets that it is keen to get rid of. The deal should be finalized over the next 18 months in which it has to also gain regulatory approval from the UK, the U.S., the E.U., and China. In the meantime, Nvidia can make a plan of action for its soon-to-be expanded chip processing business.
How does it help Nvidia?
This deal will bring in more revenue, particularly as Microsoft currently uses Arm to power its Windows 10 processors. Meanwhile, Apple announced a switch away from Intel produced chips and will be using ARM as one of its major hardware platforms in its Macs. This is a fantastic deal for Nvidia as Arm will allow it to now also fully compete with Intel in its CPU sector as well as its GPU products, thus threatening its overall dominance in the semiconductor market.
The acquisition will also give another boost to Nvidia’s current business which sells software and chipsets to help power computer networks, data centres, and cloud computing. It’s already heightened chipsets will now include the ability to efficiently power the processors too.
Finally, Arm makes Nvidia’s dream to go mobile a reality. Having unsuccessfully broached the CPU world in the past, this deal finally allows it to expand into the mobile hardware world, as it will effectively power every smartphone in the world. In combination with Nvidia’s AI expertise, this deal could make Nvidia one of the most important companies for the modern world of technology and portable AI.
MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in companies mentioned above. Read our full disclosure policy here.
Financial Writer at MyWallSt
Poppy’s favorite stock is Nvidia as she loves innovation and this stock has bags of it. Nvidia invented the GPU in 1999 and even today its immersive graphics give life to the gaming world. Poppy is also inspired by Nvidia’s ability to imagine and create positive change for the world, with its AI technology fuelling new developments in the automotive industry, the medical industry, as well as powering data centers around the world.