Like many investors these days my portfolio has some dogs and one shining star, namely Nvidia (NASDAQ:NVDA). Since taking my own advice and putting some NVDA stock in my retirement portfolio a little over a year ago, the shares have more than doubled in value.
Nvidia is due to open July 2 at $408, with a market capitalization of $251 billion. That’s a nosebleed price-to-earnings multiple of 76.4 and more than 20 times last year’s sales of about $11 billion.
The Bear Case
The bear case is all in the opening. If a stock is too dear to buy, it’s silly to do anything but sell.
What can possibly be worth 20x sales, or 77x earnings? Especially when that stock could soon be watered down by Nvidia buying Arm Holdings from Softbank (OTCMKTS:SFTBY), whose Vision Fund losses (remember WeWork?) have made it a desperate seller.
Arm had about $2 billion of revenue last year but took about $400 million in losses, its third-straight report of an operating loss. Softbank paid $31 billion for the chip technology firm in 2016 and would be demanding a fat profit despite its poor results. Nvidia had about $15.5 billion in cash and $7 billion in debt at the end of March. Stock would likely have to be part of the price — About 10% of Nvidia’s market cap plus the cash would get the prize.
Arm would make Nvidia a direct competitor to Intel (NASDAQ:INTC), but could let it return to the modem market against Qualcomm (NASDAQ:QCOM) because of Arm’s intellectual property in that area. Arm is also the reference design for phone processors. Apple (NASDAQ:AAPL) bases its chips on Arm’s chip design. At some point power is too powerful. A move might finally put Nvidia in the antitrust crosshairs.
The Bull Case
The bull case is also based on Arm and confidence that Nvidia CEO Jensen Huang could perform miracles with the asset.
Right now, Arm is just a set of reference designs. It’s mostly patents, copyrights and license agreements. Huang could make Arm a real chip company, combining artificial intelligence processing with communications. Arm would give Nvidia a major say-so in how the cloud, PCs and phones interact in an artificial intelligence age. Nvidia is already investing in Arm-based processors.
The news hit just as Nvidia’s market cap passed Intel’s. Intel’s weakness is a second reason to pull the trigger on Arm. Chip-making is an entrepreneurial business. Intel hasn’t been entrepreneurial in 20 years. Maybe it’s time for America’s chip-making industry to have a new boss as it faces new challenges from China. Huang, born in the old Taiwan capital of Tainan, could be the man for the job.
It’s not as if Nvidia would be a monopoly, even with Arm. The cloud czars – Apple, Alphabet (NASDAQ:GOOGL), Amazon (NASDAQ:AMZN), Microsoft (NASDAQ:MSFT) and Facebook (NASDAQ:FB), are increasingly designing their own server chips. Data centers are the future. Getting that business requires superior performance to what the czars themselves can deliver.
The Bottom Line on NVDA Stock
If Nvidia pulls the trigger on ARM, it’s going to be a bumpy ride for NVDA stock. Traders would be wise to take profits here and wait for a better entry point.
Long-term investors might also want to wait for that entry point. Nvidia is a great long-term holding.
But if you own Nvidia, don’t panic. You may have bought a game chip company a few years ago. You may soon have the industry’s dominant force.
Dana Blankenhorn has been a financial and technology journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Write him at email@example.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN, MSFT, AAPL, FB and NVDA.