Where does Nvidia (NASDAQ:NVDA) go from here? That’s the question a lot of people are asking about NVDA stock after the chip maker announced it was abandoning a planned $66 billion takeover of Arm due to “significant regulatory challenges.”
Since it was first announced in 2020, the acquisition of U.K.-based Arm had preoccupied Nvidia’s leadership team and taken up a lot of the company’s resources. The purchase of Arm was also seen as a primary growth driver for the company. Now that the deal is officially dead, though, many analysts are asking what Nvidia’s plan B is? Especially with NVDA stock down 11% year-to-date (YTD) at around $260 per share currently.
Here’s what you should know about NVDA stock moving forward.
NVDA Stock: Killing the Deal
Nvidia’s proposed acquisition of Arm was fraught with difficulty from the start. Originally, the company was to purchase Arm from Softbank (OTCMKTS:SFTBY) for $40 billion in stock and cash. However, the deal went on to balloon in price to a reported $66 billion. Technology firms ranging from Qualcomm (NASDAQ:QCOM) to Microsoft (NASDAQ:MSFT) publicly opposed the deal over competition concerns. What’s more, regulators around the world grew increasingly concerned about the planned acquisition. In December, the U.S. Federal Trade Commission (FTC) sued to block the transaction on antitrust grounds. Britain’s competition watchdog also announced a probe into the deal.
The main issue of concern here was that Arm makes technology at the core of many smartphone processors, including Apple’s (NASDAQ:AAPL) iPhones and Android devices running on Qualcomm microchips. Arm literally has every major semiconductor company in the world as a client. Semiconductor and technology companies feared that, if Nvidia owned Arm, it could favor its own business over clients who may not have an alternative to Arm technology. Qualcomm and Microsoft were among the most vocal critics of the deal.
Arm had been independent until 2016, when SoftBank bought the company for $32 billion. SoftBank now says it plans to take Arm public by Mar. 31, 2023. The company has also said that the $1.25 billion deposit it received from Nvidia is non-refundable and will be recognized as profit in its fiscal fourth-quarter earnings on Mar. 31.
What’s Next?
All is not lost for NVDA stock, however. The company remains a leading producer of graphics processing units (GPUs) and other microchips and semiconductors used to power video-game consoles and mobile computing. It also continues to post exceptionally strong growth and earnings. Most recently, Nvidia announced stronger-than-expected third-quarter results and gave a bullish near-term outlook, noting that it sees significant opportunity in the buildout of the metaverse. Q3 results beat analyst estimates by 6 cents per share, driven by 50% year-over-year (YOY) revenue growth to $7.1 billion.
This strong growth has powered NVDA stock higher over the last two years. Since the onset of the pandemic in March 2020, the share price gained well over 500% through last November, when it peaked at $346.47 per share. Since then, NVDA stock has come down more than 20%. The scuttled acquisition hasn’t helped the share price. Neither has Nvidia’s rich valuation.
NVDA stock costs about 60 times forward earnings. Meanwhile, main rival Advanced Micro Devices (NASDAQ:AMD) costs about half that and shares of Intel (NASDAQ:INTC) can be purchased for about 14 times earnings. Nvidia stock has gotten hit as investors move away from high-value stocks, particularly technology names.
Nvidia next reports earnings on Feb. 16.
Nvidia Will Be Fine in the Long Run
It has been a tough start to the year for Nvidia. The loss of the Arm acquisition is a blow to the company. It also comes at a time when investors are moving away from technology stocks, reallocating capital to cheaper securities as interest rate hikes approach.
However, investors should not lose sight of the fact that Nvidia remains a best-in-class technology company and a leader in the microchip and semiconductor space. The company is also highly profitable with a strong track record of earnings outperformance. Nvidia has managed to continue to outperform over the past year despite a global shortage of semiconductors.
Long-term, Nvidia will be just fine and its shareholders will continue to be rewarded. NVDA stock is a buy.
On the date of publication, Joel Baglole held long positions in NVDA and MSFT. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Joel Baglole has been a business journalist for 20 years. He spent five years as a staff reporter at The Wall Street Journal, and has also written for The Washington Post and Toronto Star newspapers, as well as financial websites such as The Motley Fool and Investopedia.
