Nvidia (NASDAQ: NVDA) recently announced that it is acquiring ARM Holdings (ARMHF) from SoftBank (OTCPK: SFTBY) for $ 40 billion. Nvidia, which is giving somewhere between 7-9% of the company to make the acquisition, has announced that it is making the world’s leading computing company the age of artificial intelligence.
SoftBank, which made the acquisition 4 years ago for $ 32 billion, effectively made $ 1-2 billion / year for investment. It now has a substantial stake in Nvidia, a company with long-term growth potential. However, as we will see throughout this article, ARM Holdings’ potential concentration in the hands of a competitor makes the deal a significant risk.
ARM Holdings – Apple Insider
ARM Holdings Largest Customer
There is a significant difference in the business models of traditional CPU companies such as Intel (NASDAQ: INTC) and AMD (NASDAQ: AMD). In particular, despite their profit margins, companies have a significant lack of customization within their products. Features such as the Apple (NASDAQ: AAPL) neural engine that supports FaceID will never be possible on other companies’ CPUs.
Graviton Competition – Anandtech
As companies have realized, and tech companies have grown, additional incentives have been given to add this customization. For example, Amazon (NASDAQ: AMZN) ARM Holdings has been calculated based on ARM Holdings as compared to Intel and AMD examples, but at a lower price and significantly lower power usage.
In fact, while AMD and ARM Holdings excel here in terms of cost effectiveness, Intel lags behind. These largest technology companies have become some of the largest customers of ARM Holdings. On the flip side of things, incentives have increased for companies like Intel and AMD to use their processor expertise to develop solutions for ARM Holdings for companies.
These days companies like Apple, Amazon and network companies are becoming the biggest customers of ARM Holdings. Many of these companies are competitive with Nvidia in some sense. This is important because these companies will be encouraged to stay away from ARM Holdings which is independent.
RISC-V Architecture and Potential
As technology companies grow larger and larger, they have the growth bandwidth to move towards solutions with significant potential long-term payoffs. Apple, through its acquisition of Intel’s smartphone modem division, is making a long-term game on modems and their capability, and as we enter the era of multi-trillion dollar companies, this is not surprising.
Key takeaways are leading companies, in the same sense that they can shift to ARM Holdings’ processors to provide scale and capability over Intel or AMD, and shift to an architecture in which ARM Holdings is not owned by Nvidia Risks. RISC-V, created by the University of California, Berkeley is an open source computing architecture that extends to 128 bits (currently 64 bits).
RIMC-V has several major advantages over ARM Holdings. However, the most important expansion is for major companies. This means that customers can adapt the architecture even further than ARM Holdings, so that their shareholders benefit the most. RISC-V combined with open source means that there is no risk of future ownership concentration.
This alone may justify customers investigating multi-year investments in switching to RISC-V. We expect that, while this may not be public, research has already begun. A potential acquisition by a competitor, Nvidia, could help accelerate this switch and drive investment much further. And it threatens to influence Nvidia of ARM Holdings.
In fact, it may also cause some “milestones” in the acquisition amounting to ~ 13% of the acquisition price.
RISC-V Potential Impact
RISC-V has significant potential implications which we have already taken the opportunity to discuss above.
RISC-V Dramatic Development – RISC-V
RISC-V is expected to experience dramatic growth, starting in the industrial category, but also in many other areas. Now, it is important to keep in mind the size difference. ARM Holdings shipped 50 billion processors by 1991–2014 and more than 160 billion processors by February 2020.
Current annual ARM Holdings processor shipment rates are in the range of 25–30 billion annuals. From 2024-2025, RISC-V is projected to ship about 20 billion processors, up from 15 billion in 2023-2024. These numbers indicate that RIMC-V is only 6-7 years behind from ARM Holdings. Whereas in the computing world it has long pointed to potential developments and to RISC-V in a big way.
As the cost of switching to the RISC-V platform becomes smaller.
At the same time, Nvidia and ARM Holdings are expected to face significant regulatory pressure on the deal.
If Nvidia decides to go ahead with the takeover attempt, it will likely be completed with intensive regulatory scrutiny. According to a Bloomberg report, SoftBank was seen as a relatively neutral buyer for Arm at the time of the acquisition in 2016, which facilitated regulatory scrutiny of the deal. Many of Nvidia’s competitors license arm architecture, and they may oppose potential acquisitions on these grounds.
– Bloomberg Potential Regulatory Investigation
Bloomberg has already discussed this, but in particular, while SoftBank is more than an “independent” holding company for technical assets, the same is certainly not the case for Nvidia. In fact, Nvidia, through its Tegra chip line, is actually an important customer of ARM Holdings. As a result, despite Nvidia’s ability to promise to keep businesses separate, customers could resist.
These regulatory issues are important for several reasons. First, they could potentially provide Nvidia significant legal expense without benefit if the takeover is called off. Or they may come up with regulatory terms that negatively hurt Nvidia’s ability to provide adequate support to the company’s customers.
Second, they can cause customers to be uncertain and move forward as a customer. Customers worried about levels of integration and regulatory restrictions with Nvidia may have to wait months or years to find answers. It may seem easy to simply separate them from the whole process.
Finally, ARM Holdings will have a significant regulatory overhead to go through the acquisition itself. This can negatively affect their ability to support customers in a way that was not there before, even if there are no other acquisition concerns. It can also explain companies that do not want to deal with uncertainty to get away.
Our investment view
Our analysis of this investment is that investors, who have jumped on the “news” for several tech stocks, may have done the same for Nvidia recently. The idea of the next big “artificial intelligence” company joining the wave of independent CPU manufacturing via ARM Holdings could give Nvidia a huge boost to its stock.
As these “hip” new technology companies reach record-breaking valuations, it is possible. Nvidia’s stock has grown 170% in the last one year and there has been no significant change in its fundamentals. The fact that about half the net acquisition value ($ 5 billion comes from bonus stock) in this “expensive” stock may be supported by the market.
The market may see this as a “cheap” similar acquisition since 2016 with a much lower price than the NASDAQ’s correction. This may increase the share price of Nvidia. We advise investors to sell the news. Nvidia is approaching triple-digit P / E ratios with a high double-digit ratio based on 2022 forecast EPS.
We recommend that any potential share price gain is a great move for shareholders selling Nvidia’s stock at this time.
Of course, our thesis has some risks. In particular, the combination with Nvidia can enable ARM Holdings to reach new customers and expand Nvidia’s reach to new heights in profits. ARM Holdings itself can also start building and selling their own CPUs, possibly partnering with OS manufacturers such as Microsoft (NASDAQ: MSFT), With the goal of being fully competitive with AMD and Intel.
This competition could dramatically increase the value of ARM Holdings, which already has a large customer base. This could increase Nvidia’s long-term value significantly.
Nvidia recently announced a staggering $ 40 billion to ARM Holdings. This represents a strong return for SoftBank; However, the correction is much lower than what the NASDAQ has returned over the same multi-year period. Indeed, ARM Holdings has significant potential.
However, we expect the potential acquisition by the customer to be the cause of significant regulatory issues. Those regulatory issues combined with consumer concerns over concentration gave the announced deal a signal to sell Nvidia stock. Given the overall valuation of the company, we recommend selling the news to investors.
Create a High Yield Energy Portfolio – 2 Week Free Trial!
The Energy Forum can help you generate high-yield income from a portfolio of quality energy companies. Energy demand is increasing worldwide and you can be a part of this exciting trend.
Also read about our newly launched “income portfolio”, which is a non-sector specific income portfolio.
Energy Forum provides:
- Managed model portfolios to generate high-yield returns.
- In-depth research report about quality investment opportunities.
- Macroeconomic Market Overview.
Click for a 2-week free trialUnconditional Money Back Guarantee and 47% Off Our Popular Annual Plan! There is nothing to lose and everything to gain!
Disclosure: I / We are long NVDA, AAPL, AMD, INTC. I wrote this article myself, and it expresses my own opinion. I am not getting compensation for this (other than Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.