Nvidia‘s (NVDA) planned purchase of chip designer Arm will allow the maker of graphics processing units to move deeper into data centers with central processing units for servers. The move would challenge Intel (INTC) and Advanced Micro Devices (AMD) in the market for server CPUs, analysts say. Nvidia stock rose on the news Monday.
Santa Clara, Calif.-based Nvidia on Sunday announced an agreement to buy U.K.-based Arm from Japan’s SoftBank (SFTBY) for up to $40 billion in cash and stock. Nvidia will pay SoftBank $21.5 billion in Nvidia common stock and $12 billion in cash. It also will issue $1.5 billion in equity to Arm employees. Plus, SoftBank may receive up to $5 billion in cash or common stock via earn-outs, depending on Arm reaching certain financial performance targets.
Nvidia hopes to complete the purchase in 18 months. However, the acquisition likely will face major regulatory hurdles, Wall Street analysts say. The deal will require regulatory approval from the U.S., U.K., European Union and China.
“Our combination will create a company fabulously positioned for the age of AI,” Nvidia Chief Executive Jensen Huang said in a written statement. “Uniting Nvidia’s AI (artificial intelligence) computing capabilities with the vast ecosystem of Arm’s CPU, we can advance computing from the cloud, smartphones, PCs, self-driving cars and robotics, to edge IoT (Internet of Things), and expand AI computing to every corner of the globe.”
Deal Would Expand Nvidia’s Reach In Data Centers
Arm would complement Nvidia’s existing GPU and data center networking businesses, Susquehanna analyst Christopher Rolland said in a report to clients. It would extend Nvidia’s reach into the CPU ecosystem and expand its influence in the data center market, he said.
Rolland rates Nvidia stock as positive with a price target of 560.
Nvidia Stock Jumps On Arm Acquisition News
On the stock market today, Nvidia stock jumped 5.8% to 514.89. Meanwhile, Intel stock rose 0.3% to 49.41. AMD stock climbed 2% to 77.90.
Nvidia’s purchase of Arm could create more competition in the server market. With Nvidia’s backing, Arm “could challenge the stranglehold x86 CPUs have on the data center today,” Truist Securities analyst William Stein said in a note to clients. Intel has about 85% to 90% of the market for x86 servers. AMD has about 8% to 10% of the market.
However, Nvidia could have pursued such a strategy by licensing Arm technology rather than buying the company, Stein said.
Stein rates Nvidia stock as buy with a price target of 550.
Arm Purchase Seen As ‘Assault’ On Intel’s Server Business
Nvidia’s purchase of Arm would be “an assault on Intel’s server CPU business,” Raymond James analyst Chris Caso said in a report. “The intention would seem to be to become able to offer server customers a broader roadmap that covers CPU, GPU and server.”
AMD’s server business also could be negatively impacted, he said.
Caso rates Nvidia stock as outperform. Nvidia and Arm would be “a powerful combination,” he said.
China, Arm Licensees Could Oppose Acquisition
The many licensees of Arm technology are likely to oppose the Nvidia purchase, Deutsche Bank analyst Ross Seymore said in a note. He rates Nvidia stock as hold with a price target of 450.
“There could be a myriad of conflict of interest issues whereby Nvidia could have access to competitor strategies/technologies in a variety of Nvidia-targeted markets (data center, auto, etc.),” Seymore said. Nvidia will need to provide significant assurances that it will have a business firewall to prevent it from accessing Arm customer technologies and plans, he said.
Wedbush Securities analyst Matt Bryson thinks China is likely to prevent Nvidia from acquiring Arm. China’s Ministry of Commerce will be loath to let U.S.-based Nvidia have control of such an important piece of semiconductor intellectual property, he said in a report. This is especially true given trade tensions between the U.S. and China.
Bryson rates Nvidia stock as outperform with a price target of 525.
Nvidia Stock Gets Price-Target Hikes
Nvidia stock received at least two price-target hikes on the news.
Piper Sandler analyst Harsh Kumar kept his overweight rating on Nvidia stock and raised his price target to 575 from 540.
FBN Securities analyst Shebly Seyrafi reiterated his outperform rating on Nvidia stock and upped his price target to 600 from 550.
Arm generated revenue of $1.8 billion in the trailing 12 months ending in March. It has a gross profit margin of about 94%, vs. Nvidia’s 66%. Arm’s adjusted margin for earnings before interest, taxes, depreciation and amortization is about 35%, vs. Nvidia’s 48%.
Follow Patrick Seitz on Twitter at @IBD_PSeitz for more stories on consumer technology, software and semiconductor stocks.
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