In the wake of Nvidia’s (NASDAQ:NVDA) acquisition of Arm Holdings, I’m very bullish on the longer-term outlook of NVDA stock.
Assuming the Arm deal is approved, I believe that the combined company will have one of the biggest and best cross-selling/upselling opportunities in history. Meanwhile, Nvidia’s continued, strong success in artificial intelligence (AI) has also made me more upbeat on the company’s outlook.
Nvidia’s $40 billion acquisition of Arm, reportedly the world’s “largest designer of microprocessors,” should give Nvidia a huge opportunity to sell its offerings to other chip makers and potentially to device makers as well.
A Huge Cross-Selling and Upselling Opportunity
With AI proliferating in so many markets and devices, the Arm deal should enable Nvidia to sell its AI-enabled chips to the many mobile chip makers that license Arm’s technology. Nvidia could add instructions on how to incorporate AI capabilities into some of Arm’s chip component designs.
Nvidia could then charge much higher licensing fees for those designs than what Arm charges now. And Nvidia can offer separate AI-enabled products to the semiconductor companies that currently license Arm’s designs.
This opportunity is what Nvidia CEO Jensen Huang was referring to when he said, “Our dream is to bring Nvidia’s AI to Arm’s ecosystem, and the only way to bring it to the Arm ecosystem is through all of the existing customers, licensees and partners.”
And as I mentioned earlier, the Arm deal could also enable Nvidia to sell its AI-enabled chips directly to the makers of smart devices, including Apple (NASDAQ:AAPL) and Samsung.
To make that happen, Nvidia would simply have to “shut out the middlemen,” i.e. the chipmakers to whom Arm licenses its designs now. Instead, Nvidia could sell and/or license chips based on Arm’s designs, beefed up with Nvidia’s graphical and AI prowess, directly to smartphone and tablet makers.
Nvidia Is Doing Very Well in the AI Arena
After analyzing the transcript of Nvidia’s third-quarter earnings conference call, I’m convinced that the company is doing very well on the AI front.
For example, Nvidia CFO Colette Kress noted that the company was using AI in its tool that enhances the quality of video conferences. And videogame makers are also using AI to improve their products, as well as in its new “3D collaboration and simulation platforms,” Omniverse.
Kress also reported that Nvidia was partnering with drug maker GlaxoSmithKline (NYSE:GSK) to utilize AI to develop pharmaceuticals, and she reported that Nvidia’s A100 GPU chip had beaten CPUs “by up to 237 times” in a “recommend data test” and “by 30 times” in an “image recognition” competition.
And according to Kress, “we estimate that Nvidia installed GPU capacity for inference across the seven largest public clouds now exceeds that of the aggregate CPU capacity in the cloud.” Moreover, she reported that “our inference initiative is really gaining great momentum.”
And finally, but importantly, the company expects its core datacenter business to grow about 5% in the fourth quarter versus Q3. That forecast indicates that Nvidia’s AI is still being well received by datacenters, while its datacenter unit is not being meaningfully hurt by reopenings and reduced fears about the coronavirus.
In an August. 24 column, I had expressed concern about the competition that Nvidia would face from Intel (NASDAQ:INTC), given the latter company’s improvements on the AI front. But Nvidia’s clear recent strength in AI, along with the tremendous opportunities created by the Arm deal, have changed my mind about Nvidia’s outlook.
The Bottom Line on NVDA Stock
NVDA stock looks poised to benefit tremendously from the Arm deal and its strength in AI. Consequently, with Nvidia stock trading at a reasonable 46x next year’s estimated profits, I recommend that longer-term investors buy the shares.
On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks, and Snap. You can reach him on StockTwits at @larryramer.