Nvidia Stock Is a Buy Even After the Arm Deal Came Apart


Nvidia Corporation (NASDAQ:NVDA) stock failed to re-take all-time highs after posting solid quarterly results on Feb. 16, but that makes it a buying opportunity.

A racecar featuring Drive PX 2 technology from Nvidia (NVDA) parked.
Source: Steve Lagreca / Shutterstock.com

The leader of cryptocurrency mining, omniverse (as opposed to metaverse), high-end PC gaming and artificial intelligence will post stronger growth as the year unfolds.

In the fourth quarter, Nvidia posted an impressive 53% growth in revenue Y/Y, to $7.64 billion. Its multiple tailwinds are in Gaming, Data Center, and Professional Visualization market platforms.

Earnings per share rose by 103% Y/Y to $1.18 or $1.32 on a non-GAAP basis. Founder and Chief Executive Officer Jensen Huang said Nvidia is advancing such fields as AI, digital biology and climate sciences. This year, its new software business model with AI, Omniverse, and Drive will accelerate demand.

Bears, who are in the minority with a 1.04% short float, may cite Nvidia’s flat gross margin as a fault.

At 65.4% gross margin, up 230 basis points, Nvidia’s business shows no sign of slowing down. The company forecasted a Q1/2023 revenue of $8.1 billion. GAAP gross margin will be 65.2% and 67% on a non-GAAP measure.

Arm Acquisition and NVDA Stock

Nvidia’s expenses of $3.55 billion in Q1 will include writing off Arm. It announced the termination of the acquisition on Feb. 7.

This is “because of significant regulatory challenges preventing the consummation of the transaction, despite good faith efforts by the parties.” Nvidia does not need to rely on mobile computing and AI-related developments in that space to grow. Investors may buy Arm stock when Softbank (OTCMKTS:SFTBY) lists the firm on the public markets.

Nvidia spent more than a year seeking approval of the Arm acquisition, but the breakup fee is a small expense. The company likely has a favorable licensing deal that will more than make up for the cost. Furthermore, Nvidia is on track to launch its Arm-based CPU. It will target big AI and High-Performance Computing (HPC) workloads starting in the first half of 2023.

Nvidia has a 20-year architectural license on Arm’s intellectual property. It will have three chips based on the IP: CPU, GPU (graphics), and DPU (dedicated data chips).

NVDA by the Numbers

Nvidia has a strong opportunity to build its data center business. As it moves into the current quarter (Q1), it has hyper-scale, enterprise core, enterprise edge, and public cloud markets.

In practical terms, it will have AI models that power conversational AI used by clients for providing customer service. In addition, it has chatbots to power customer service applications.

Nvidia, like other semiconductor firms, faces some supply constraints. Nvidia managed supply shortage issues for its networking unit in the data center business. Still, the situation is improving daily. For fiscal year 2023, investors should model revenue growing by at least 50% annually through the fiscal year 2027.

In a five-year discounted cash flow revenue exit model, assume a multiple of six times:

Metrics Range Conclusion
Discount Rate 8.5% – 7.5% 8.00%
Terminal Revenue Multiple 5.7x – 6.3x 6.0x
Fair Value $371.41 – $421.92 $396.17

Model courtesy of finbox

The above metrics suggest that NVDA stock is worth almost $400. Below is my revenue forecast for Nvidia:

(USD in millions) Input Projections
Fiscal Years Ending 22-Jan 23-Jan 24-Jan 25-Jan 26-Jan 27-Jan
Revenue 26,914 40,371 60,557 90,835 136,252 204,378
% Growth 61.40% 50.00% 50.00% 50.00% 50.00% 50.00%
EBITDA 11,215 16,148 24,223 36,334 54,501 81,751
% of Revenue 41.70% 40.00% 40.00% 40.00% 40.00% 40.00%

Model courtesy of finbox

On Wall Street, analysts have an average price target of $362 (per Tipranks). The optimism is justifiable. Nvidia’s profits face no meaningful competition.

Nvidia’s gaming cards are superior to that of its competitor offered by Advanced Micro Devices (NASDAQ:AMD). Both firms released budget GPUs recently. Nvidia’s RTX 3050 offers RTX ray tracing and DLSS (Deep Learning Super Sampling). This increases chip performance using a dedicated tensor core AI.

AMD’s RX 6500 XT GPU is a less impressive budget release. Not only is it not available but third-party sellers are asking for more than double the retail price.

Intel (NASDAQ:INTC) relies on the CPU market for growth. It is on the cusp of expanding its market by entering the GPU segment. Fortunately for Nvidia, Intel delayed its Arc gaming GPUs until the spring (or in Q2).

Risks and Your Takeaway

Supply constraints will limit Nvidia’s growth. Still, Q4 results did not weaken despite headwinds. In addition, Nvidia faced demand constraints across its entire range of products.

Investors should treat the constraints as temporary. Nvidia has complicated products in high demand. It is expanding its supply base. Expect Nvidia’s supply to increase throughout the year as a result.

Nvidia’s billion-dollar costs from the Arm acquisition falling through is a one-time cost. Still, it has the Grace CPU that supplies enhanced deep recommendation systems for customers.

Nvidia stock pulled back sharply from Nasdaq’s peak set on Nov. 2021. Markets will continue to sell off weak companies that have no hope of profits. Conversely, Nvidia has consistently strong profitability and accelerated growth. Investors should consider adding small positions whenever the stock dips.

On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns.


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