Among large-cap semiconductor names, Nvidia (NASDAQ:NVDA) is a story unto itself. Buoyed by the familiar catalysts of data centers and graphics processing units (GPUs), NVDA stock is up over 120% year-to-date (YTD) and is one of the biggest domestic chip manufacturers by market capitalization.
As of Dec. 11, Nvidia is off 13.3% from its 52-week high. That decline could extend, but for several years now, essentially every pullback has been an invitation to embrace this stock. Waiting for Nvidia to be “cheap” is a fool’s errand because, well, it’s basically always expensive. However, there might be some value here — if analysts are correct — because the stock labors around $520 with a median consensus price target closer to $600.
Additionally, for long-term investors, there’s chatter about the company making its way to the prestigious $1 trillion market cap club, a group currently occupied by just four domestic companies. RBC Capital Markets analyst Mitch Steves says NVDA stock can join those vaunted ranks if it gets regulatory approval for (and can properly digest) its $40 billion purchase of Arm Holdings, the largest acquisition in the chipmaker’s history.
Steves notes, “I think this is a very significant transaction for them and I honestly would not be surprised to see Nvidia become a trillion-dollar company, assuming that they can close that transaction.”
So, is there enough meat on the bone here for investors? Regardless of whether the company cinches the deal, NVDA has plenty of growth ahead.
NVDA Stock Can Join the Club
There was probably a time in market history when companies sporting $1 trillion or larger market values was unthinkable. And there was probably a time when the law of large numbers meant something. However, the likes of Apple (NASDAQ:AAPL) and Amazon (NASDAQ:AMZN) debunk that thinking.
As for Nvidia getting to $1 trillion, it’d need to more than triple from its Dec. 11 market capitalization of $321.9 billion. On a purely superficial basis, NVDA stock tripling isn’t out of the realm of possibility. From its March trough to its September peak, the name more than tripled.
All of that gets us back to the Arm deal. In this transaction — assuming it gets done (and that’s not a guarantee) — Nvidia is attempting to bolster its already flourishing artificial intelligence (AI) business by adding AI-as-a service (AIaaS) capabilities from Arm.
Forgive the use of annoying corporate lingo, but there are credible synergies between Nvidia and Arm. For example, AI-based cloud computing services use GPU processing to manage large projects. However, companies wanting to deploy that concept at offices or data centers face significant hardware and software expenditures. AIaaS eases that burden by allowing potential clients to explore capabilities without big upfront payments, thereby diminishing risk.
Underscoring the viability of AIaaS is the fact that it’s attracting players like Amazon, Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) and IBM (NYSE:IBM), too. Of course, this is still a small market, but it’s also projected to experience exponential growth over the next several years. Basically, it will become essential for customer-centric companies to get a leg up on their competitors in the digital age.
A Buy With or Without ARM
But here’s the deal with Nvidia’s efforts to acquire ARM. For one, plenty of governments the world over may be hesitant to approve this takeover for fear of the technology falling into the wrong hands. Additionally — although Arm is being sold by Japan’s Softbank (OTCMKTS:SFTBY) — it’s a British company. There’s some speculation that U.K. regulators don’t want one of the country’s few homegrown tech companies being sold to an American firm.
Admittedly, that’s conjecture, but some analysts believe it’s not a foregone conclusion that the deal reaches the finish line.
Obviously, that would introduce headline risk to the NVDA stock equation. But it’s a scenario the company can rebound from. Revenue grew 57% in the fiscal third quarter of 2020. Plus, the company’s AI business — which doesn’t include Arm yet — is so robust that it’s already successfully training networks with significantly less data.
Translation? I can’t promise that the ride will be smooth and that NVDA stock will reach $1 trillion, but Nvidia still offers significant upside to $600 or even $620 from current levels.
On the date of publication, Todd Shriber did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Todd Shriber has been an InvestorPlace contributor since 2014.
