Nvidia Stock Soars on Acquisition of SoftBank-Owned Arm. Is it a Good Deal?

Author: Tim Phillips

September 15, 2020

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Nvidia Inc (NASDAQ: NVDA), the chip giant that specialises in artificial intelligence and gaming graphics, saw its shares climb as much as 10% on Monday. 

The surge came as Nvidia announced it will buy Arm Holdings from SoftBank Group Corp (TYO: 9984) in a US$40 billion cash-and-stock deal. Nvidia shares pared the early gains but still ended up the day by 5.8%.

Tim’s Take:

Nvidia has had an absolutely stunning year so far in 2020. Shares are up 115% year-to-date and this was a company that already had a huge market capitalisation. After the run-up, it’s now worth close to US$320 billion.

The chip designer engineers highly-efficient graphic processing units (GPUs). It specialises in chips used for artificial intelligence (AI) applications, gaming and data centres, and has been one of the leading innovators in the semiconductor space.

It’s not hard to see why it’s been on such a run. The company has been winning on multiple fronts. Its latest earnings (for the fiscal second quarter) saw an impressive 50% year-on-year rise in revenue to US$3.87 billion.

It’s seeing demand come together from all the right spaces it operates in. These include gaming (supplying Microsoft and Sony the gaming chips), data centres, and AI applications – all of which are seeing increased use given the Covid-19 pandemic.

New access to new markets

The Arm deal gives Nvidia access to a whole new market for chips. Arm, currently owned by SoftBank, is the leading designer of chips that go into smartphones and tablets hawked by the likes of Apple Inc (NASDAQ: AAPL) and Samsung Electronics Co Ltd (KRX: 5930).

Arm will equip Nvidia with a whole new stable of highly-valued intellectual property that it can use. Remember that Nvidia (as well as Arm) merely design the chips being produced. 

The actual physical manufacturing of the semiconductors tends to be outsourced to “fabs” such as Taiwan Semiconductor Manufacturing Co (NYSE: TSM), also known as TSMC. Nvidia already uses TSMC to produce its chips.

However, there are still regulatory hurdles to clear, particularly in China where access to semiconductor technology is a sensitive topic.

If the deal does go through, I believe the mega-deal will strengthen Nvidia’s positioning in the highly-competitive semiconductor space. It should also end up being a boon for TSMC, too, as it’ll receive more business from the combined entity. 

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About the Author: Tim Phillips

Tim, based in Singapore but from Hong Kong, caught the investing bug as a teenager and is a passionate advocate of responsible long-term investing as a great way to build wealth. He has worked in various content roles at Schroders and the Motley Fool, with a focus on Asian stocks, but believes in buying great businesses – wherever they may be. In his spare time, Tim enjoys running after his two year-old son, playing football and practicing yoga.