As the world attempts to recover from the onset of the novel coronavirus, tech companies like Nvidia (NASDAQ:NVDA) have demonstrated in impressive degree of strength and resiliency. NVDA stock traders have kept the price afloat, perhaps to the point where the shares appear to be rather pricey now.
That’s a legitimate concern since contrarians and value investors don’t typically want to own a stock after a sustained run-up. As we will discuss, an argument can be made that Nvidia stock isn’t a bargain from a valuation standpoint.
Even with that in mind, though, there still might be a compelling reason to buy the shares now. A possible buyout of a well-known semiconductor design company could provide a catalyst for a sharp move in Nvidia stock irrespective of its currently lofty price point.
A Closer Look at NVDA Stock
As I alluded to earlier, it’s hard to build a case that Nvidia stock is a bargain. A trailing 12-month price-to-earnings ratio of 79.38 does indeed suggest that Nvidia may be somewhat overpriced.
Moreover, a paltry forward annual dividend yield of 0.15% won’t bring many income-focused investors into the fold. Rather, Nvidia stock will have the strongest appeal to momentum-oriented traders.
And there certainly is momentum in the stock as it’s trading at more than twice its 52-week low price of $147.39. The angle of the bull run since NVDA bottomed out in mid-March has been steep – maybe a little bit too steep for more cautious investors.
A dose of caution isn’t necessarily a bad thing when stocks go parabolic. Yet, informed investors must balance out valuation-related concerns with the growth prospects of the company. And in the case of Nvidia, there’s reason to believe that the company’s growth could accelerate in the near future.
Costing an Arm and a Leg (but Worth It)
When financial firm SoftBank Group (OTCMKTS:SFTBY) bought microprocessor designer Arm Holdings back in 2016, it was big news. This was a massive $32 billion acquisition, after all.
An even bigger deal could be in the works this year, however. Private sources have revealed that Nvidia is in advanced talks to acquire Arm from SoftBank. Not only that, but Nvidia is apparently the only company that’s currently engaged in concrete discussions about buying Arm from SoftBank.
The deal isn’t finalized and no price has been announced. Nevertheless, it’s natural to assume that the acquisition would be valued at much more than $32 billion.
Processors based on Arm’s designs power 95% of mobile phones and tablets globally. Plus, Arm designs processors for personal computers. Buying Arm won’t be cheap, but it could make Nvidia even more competitive than it already is.
The Long Arm of the Law
There are concerns that the Arm buyout, if it happens, would be big enough in scale to draw attention and scrutiny from regulators. So, let’s not get overly excited about the prospect of a mega-sized acquisition. First, we should take a step back and consider the regulatory implications.
There’s merit to this argument since the acquisition could possibly be the biggest semiconductor-industry deal in history. Lawmakers might not be too pleased with further consolidation in a tech market that has already seen its fair share of consolidation in recent years.
As a result, cautious investors shouldn’t view the Arm acquisition as a done deal. Instead, traders can take a small position in Nvidia stock in anticipation of the deal possibly going through later this year or at some point next year.
The Bottom Line
Based on valuation metrics, an argument can be made that Nvidia stock is somewhat overpriced. Still, the possibility of the Arm acquisition could be sufficient reason for traders to take a position in anticipation of further share-price gains.
As of this writing, David Moadel did not hold a position in any of the aforementioned securities.
