Semiconductor and graphics processing unit manufacturer Nvidia (NASDAQ:NVDA) is known as a company that supplies chips that render images in video games. Nvidia stock went on a tear this year due to the boom in video games as people stayed indoors during the onset of the novel coronavirus pandemic.
However, Nvidia is not the type of company to sit back and be complacent with its accomplishments. What got Nvidia to the forefront of the tech sector is the company’s drive to innovate and expand.
Thus, Nvidia announced in September that the company is buying mobile device chip architecture manufacturer Arm from Japanese tech conglomerate SoftBank (OTCMKTS:SFTBY).
It was a controversial move in more ways than one. Tech geeks and financial pundits have been heatedly debating whether the Arm acquisition is a smart move. I propose that Nvidia stockholders will eventually benefit from the admittedly expensive Arm acquisition.
A Closer Look at Nvidia Stock
Nvidia stock provides a textbook example of how the technology sector has benefited from trends arising from the coronavirus. Many people have spent more time at home, and that’s been bullish for companies associated with computer gaming.
This phenomenon helps to explain how Nvidia stock ascended from a 52-week low of $180.68 to a breathtaking 52-week high of $589.07 this year. Now Nvidia stock trades near $565, demonstrating that the bulls are still in control of the price action.
Hence, momentum-focused traders should really like Nvidia stock. On the other hand, the trailing 12-month price-earnings ratio of 92 might bother value-oriented investors.
What concerned investors should realize is that nowadays, tech stocks with high P/E ratios can keep going up. I’m not saying that valuations don’t matter anymore. It’s just in 2020, a high valuation isn’t a barrier to continued growth among tech stocks, including Nvidia stock.
Making Sense of the Arm Deal
Arm’s business model involves licensing designs for chips that are mostly used in smartphones. A valid question might be: Why would Nvidia be interested in Arm?
As I mentioned earlier, Nvidia is a company that understands the need to innovate and expand its horizons. Nvidia is a leader in graphics cards for video games. Yet, the company also wants to be a strong competitor in the area of smartphone technology.
That ambitious objective has been out of reach for Nvidia, until now. Arm is well known for its powerful and efficient smartphone chip designs. Countless mobile devices around the world use some version of Arm’s chip technology.
SoftBank acquired Arm in 2016, but the word on the street (Wall Street, that is) has been that SoftBank could really use a cash infusion. Therefore, Nvidia’s $40 billion purchase of Arm should truly represent a win-win scenario for all parties involved.
Costing an Arm and a Leg
Yet, there’s no question that the $40 billion price tag raised more than a few eyebrows. I’ve seen folks on social media complain about how expensive the Arm acquisition is.
It appears that Nvidia is taking it in stride, however. Nvidia founder and CEO Jensen Huang even joked to SoftBank CEO Masayoshi Son, “I had to pay you an arm and a leg for it.”
As a jokester myself, I can appreciate Huang’s play on words. More importantly, Huang knows full well that Arm’s customer network is a highly valuable asset.
Sure, there will be concerns about regulators intervening in such a massive deal. But we’ve heard these concerns about mega-deals going through before, yet most of the time the worries are overstated and the deals end up being finalized after some finagling and negotiation.
At the end of the day, Huang was perfectly aware of these concerns and there’s no doubt that he conducted a risk-reward analysis beforehand. “I told you I was going to be the last and highest bidder,” Huang said regarding the Arm acquisition, and it certainly looks like he’s kept his promise.
The Bottom Line
Only time will tell whether the Arm purchase will benefit Nvidia stock investors. There might be regulatory resistance, but these types of issues are usually surmounted in the end.
The most important thing to remember is that Nvidia is taking steps to maintain its status as an innovator. After all, that’s what made Nvidia a tech-sector leader in the first place.
On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article.
