ii view: Nvidia paying Softbank $40bn for ARM Holdings

This mega-deal will create a powerful microchip company with artificial intelligence firmly in its sights. 

Nvidia buying ARM Holdings

Founder and chief executive Jensen Huang said:

“AI (Artificial Intelligence) is the most powerful technology force of our time and has launched a new wave of computing. In the years ahead, trillions of computers running AI will create a new internet-of-things that is thousands of times larger than today’s internet-of-people. Our combination will create a company fabulously positioned for the age of AI.”

ii round-up:

US computer chip maker Nvidia (NASDAQ:NVDA) is to buy UK-based chip designer ARM Holdings for up to $40 billion (£31.2 billion) from Japanese company SoftBank.

The deal, if cleared by UK, US and Chinese regulators, will create a major new force in the world of computer microchips.

ARM designs and licenses its chip architectures to makers such as Qualcomm, whose product is used in both Apple (NASDAQ:AAPL) and Alphabet Google (NASDAQ:GOOGL) android software mobile phones across the globe. 

Nvidia, which started as a designer of graphics chips, is now a maker of chips used in gaming hardware and data centres used to store vast amounts of both consumer and corporate data in the so-called Cloud. Its chips are also widely used in the world of Artificial Intelligence, or AI.

Nvidia, which already competes against the likes of Intel (NASDAQ:INTC) and Advanced Micro Devices (NASDAQ:AMD), is likely to face significant regulatory hurdles along with potential objections from rivals. 

The California headquartered company will pay SoftBank $21.5 billion in shares and $12 billion in cash, including $2 billion upon completion.

Nvidia shares have more than doubled year-to-date and are up over 4,000% in the last 10 years. Shares for rival AMD are up by 66% in 2020 and over 1,000% in the last 10 years. Industry giant Intel shares are down just over 15% this year and up by over 160% in 10 years. 

The deal is expected to complete by March 2022. 

ii view:

Nvidia describes the Graphics Processing Unit (GPU) as now being the computer brain at the intersection of virtual reality, high performance computing and artificial intelligence. 

Demand for its data centre chips has been driving sales over recent quarters. So-called hyperscale customers such as Microsoft (NASDAQ:MSFT), Amazon (NASDAQ:AMZN) and Google group Alphabet (NASDAQ:GOOGL), although not named, are thought to be players in fuelling demand. Major organisations, including the US military, now look to outsource their data.

The coming together of a major player in the gaming and data centre arena with a key force in the mobile phone chip world would be seismic. Apple previously announced plans to switch its Mac computers from Intel chips to an ARM-based design. The Covid-19 pandemic also continues to underline the importance of IT infrastructure to corporations across the world. 

For investors, the strong share price performance of Nvidia shares in 2020 compared to more sedate gains for rivals arguable generates some caution. A doubling for Nvidia compares to gains in the 20% region for Qualcomm (NASDAQ:QCOM) and ASML. An estimated price/earnings (PE) ratio in the 50s is comfortably ahead of Intel’s at around 10 and Qualcomm’s at nearly 30. But growing data centre demand, the growth potential for AI and now the added potential combination with ARM, all make Nvidia a must watch technology share for investors. 

Positives: 

• Second quarter data centre revenues up 167% to $1.75 billion
• Second quarter gaming revenues up 24% to $1.65 billion

Negatives:

• Covid-19 uncertainty for some customer sectors like automotive
• A price to net asset ratio of 24.6 times, above the three-year average of 14.2 times

The average rating of stock market analysts:

Buy