FINDING A MILLIONAIRE-MAKING STOCK!
Disclaimer: Good Day, Readers. WealthBuildingPowers blog is a financial literacy/competency blog and does not provide specific investment recommendations.
{This is a longer blog than usual. REALITY – I have never found a get-rich-quick SCHEME that worked. I am wealthy because I work hard. So, no apologies for the length; after all, I had to put the work in attempting to help each reader achieve their financial freedom.}
MILLIONAIRE-MAKING STOCK {EXAMPLE – APPLE}
If you invested $1,000 in Apple’s December 1980 IPO, it would be worth more than $430,000 today. For those that intelligent and lucky, I bow to your brilliance! Unfortunately, in December 1980, I had just graduated from college, had almost ZERO financial literacy, nor a spare $1,000! {I should have borrowed from my brother!}
INVESTING IN APPLE STOCK 16 YEARS AFTER IPO
If you had waited 16 years to ensure Apple was viable and invested $1,000 in 1996, today, that is worth about $65,142. Would you be disappointed in a 65,142 percent return over 25 years? {DANGER WILL ROBINSON- THIS WAS A TEST TO THIN OUT THE DUMB- ANSWER HELL NO!}
HOW MANY TIMES HAVE YOU THOUGHT – WALMART, APPLE, AMAZON, ETC. STOCK PRICES ARE JUST TOO HIGH? THIS CANNOT END WELL! HOW OFTEN WERE WE WRONG?
When you identify a great company kicking their competitors behind and growing earnings per share quarter after quarter, study the company and decide if this company is a good buy today. Do NOT waste time with “what if” I had purchased ten years ago? Unless a genie grants you three wishes, you are wasting time and energy.
APPLE’S MILLIONAIRE MAKING STOCK GAINS
For those looking for the next Apple, the first place I suggest you look is APPLE! Do your homework and decide does Apple still have years of earnings growth.
FINDING THE NEXT MILLIONAIRE-MAKING STOCK!
Just as Apple, Amazon, Microsoft, etc., created new markets, the below companies may be doing the same thing. Here are some new kids on the block, and most did exceptionally well in 2020. How Well? Let’s take a look.
| FINDING THE NEXT APPLE | WHY ON THE WEALTH-BUILDING POWERS LIST? | 2020 STOCKS RETURNS (%) |
| Peloton | I thought few would buy a $5,000 bike. I was wrong. The real story is in the continuous $50 monthly prescriptions! $$$$ | 390% |
| Draft kings | Americans love to gamble, and this company allows it 24/7! | 336% |
| ETSY | Allows sellers of homemade goods (clothing, crafts, tools, photography, etc.) to reach hundreds of millions of potential buyers. I have used it for unique gifts. GREAT platform | 296% |
| The Trade Desk | Ad buyer’s technology platform-helping clients take even more money out of YOUR pockets | 195% |
| DocuSign | In 2020, I purchased two rental properties in N.C.and never left my home to finalize the transaction. CONVENIENCE | 192% |
| Nvidia | Designs graphic processing units utilized in two of the fastest-growing segments- Electric Vehicles and Autonomous Vehicles. Worth $$ TRILLIONS | 134% |
| ROKU | The leading streaming service with over 40 billion hours of content streamed in 2019 | 133% |
| Salesforce | Provides cloud solutions, including the popular for businesses Sales Cloud. | 33% |
| Airbnb | My daughter introduced me to Airbnb, and it was one of my best vacations. Coming out of Covid = PENT UP TRAVEL DEMAND | Airbnb started trading publicly in late 2020, 12-10-2020 |
All the above companies are on one or more of my Watch List. I build stock and ETF watch lists to study and analyze companies and industries for potential share purchases.
Below are some of the evaluation factors I utilize before stock buys.
LET’S ANALYZE NVIDIA AS A POTENTIAL MILLIONAIRE MAKING STOCK
NVIDIA’S CORE CUSTOMERS ARE IN FOUR RAPIDILY GROWING NEW INDUSTRIES
Gaming
Cryptocurrency
Electric Vehicles
Autonomous Vehicles
NVIDIA’S STOCK FUNDAMENTALS
In the interest of time, I will only discuss one of the above fundamentals -earnings.
NIVIDA’S EARNINGS
CONSISTENT EARNINGS GROWTH INCREASES THE STOCK PRICE
In the above graphic, the thin green line is actual earnings, and the wider body is the estimated earnings. Note a steady increase in earnings per share from July 2019 to last reported April 2021. The company exceeded expectations each quarter.
GRAPHICS PROCESSING UNITS (GPU)
NVIDIA invented the GPU in 1999. This chip was the first created for the rapidly growing gaming industry. Think about how many people you know who love games. Most likely, they are using an Nvidia GPU.
In 2006, Nvidia introduced the CUDA programming model, turning GPUs into general-purpose processors. This innovation transformed NVIDIA into a supercomputing company.
The company’s R&D pipeline is full of new innovative products, and some will be future growth and earnings drivers.
BUSINESS STRATEGY AND FUTURE OUTLOOK {SEE APPENDIX 1.0 – MORNINGSTAR QUARTERLY REPORT}
EXECUTIVE TEAM
ON HIS 30TH BIRTHDAY, 1993, HUANG COFOUNDED NVIDIA AND IS CEO/PRESIDENT
NVIDIA PRODUCTS – SOURCE- MORNINGSTAR
1. DATA CENTER
“Currently, NVIDIA controls over 90% of the data center accelerator market. Over the past 12 months, its data center business generated $7.6 billion in revenue, up 117%. But management sees a much larger market opportunity — which could generate $100 billion by 2024.
To that end, NVIDIA recently launched the DGX SuperPOD, a turnkey solution for enterprise artificial intelligence (AI). This cloud-native supercomputer simplifies AI, delivering in one platform all of the resources (i.e., hardware and software) clients need to build and deploy AI applications.
Likewise, the Bluefield-3 data processing unit (DPU) is a new chip designed to accelerate and secure data center infrastructure. Specifically, DPUs off-load services like networking, storage, and security, boosting the performance of central processing units (CPU).
Finally, NVIDIA recently announced the Grace CPU. Set to launch in 2023, this ARM-based processor will accelerate AI workloads by a factor of 10. Moreover, alongside the DPU and GPU, it will make NVIDIA a three-chip company. CEO Jensen Huang believes this vertical integration will be a significant advantage, allowing NVIDIA to “re-architect the data center to advance AI.”
2. AUTONOMOUS VEHICLES
The NVIDIA DRIVE platform is designed to power autonomous vehicles (AVs). It combines in-car hardware with AI software, allowing vehicles to see, think, and move safely through their environments. In a recent report from advisory firm Navigant Research, NVIDIA DRIVE ranked as the No. 1 AV compute platform on the market.
The brain behind this system is NVIDIA Orin, a supercomputer that delivers 254 TOPS of performance, meaning it can perform 254 trillion operations per second. By comparison, the latest chip from Intel’s Mobileye — the No. 2 player in Navigant’s report — delivers just 24 TOPS.
3. NVIDIA ORIN
Orin will ship in 2022. Automakers NIO, Volvo, and others have already selected NVIDIA DRIVE to power their autonomous fleets. As a result, NVIDIA is set to recognize $8 billion in automotive revenue over the next six years.
Management believes the Autonomous Vehicle platform market will reach $25 billion by 2025. Given its competitive edge, NVIDIA could capture the lion’s share of that figure. And if that happens, automotive sales could become a third significant revenue stream for NVIDIA, supplementing its gaming and data center businesses.
4. NVIDIA OMNIVERSE
“This summer, NVIDIA will launch Omniverse, a platform that allows clients to build 3D simulations in real-time. It connects industry-leading design tools from partners like Autodesk and Adobe, enabling collaboration in a shared virtual space. Three reasons this is a big deal:
- Omniverse will accelerate AI. NVIDIA DRIVE Sim is an Omniverse-powered application that allows clients to generate synthetic driving data. That data can then be used in the real world to train AI models for autonomous vehicles.
- Omniverse is a subscription product. That’s noteworthy because semiconductor sales tend to be cyclical, which can cause lumpy revenue growth. But subscription sales are typically recurring in nature, meaning Omniverse could help NVIDIA grow its top line more consistently.
- NVIDIA believes this is a stepping-stone to the Metaverse. If you’re unfamiliar with the term, the idea comes from science fiction. The Metaverse refers to a persistent virtual world, a digital reality where people can interact and share experiences.
Here’s the big picture: The virtual reality market will hit $69 billion by 2028, according to Grand View Research. And so far, NVIDIA Omniverse is gaining traction rapidly. During the three-month beta testing period, it was downloaded by over 17,000 users.
CONCLUSION – FINDING A MILLIONAIRE-MAKING STOCK!
BULLISH CASE (MORNINGSTAR REPORT)
- “The proliferation of the artificial intelligence and deep learning phenomena that rely on Nvidia’s graphics chips presents the firm with a potentially massive growth opportunity.
- The firm has a first-mover advantage in the autonomous driving market, leading to the widespread adoption of its Drive PPX self-driving platform.
- The increasing complexity of graphics processors provides a barrier to entry for most potential rivals, as it would be challenging to match Nvidia’s large R&D budget.”
BEARISH CASE (MORNINGSTAR REPORT)
- “The artificial intelligence opportunity remains nascent, and it is not a foregone conclusion for Nvidia’s GPUs to dominate.
- Nvidia’s automotive endeavors face plenty of competition, as numerous chipmakers are targeting the market.
- A large portion of sales come from the maturing PC industry via PC gaming.”
I utilize Google search and several paid sources for company analysis, including Morningstar, Barons; Investment Business Daily; Bloomberg-Business Week, and Response. Today’s blog represents about 10 percent of the research I conduct prior to buying a company’s stock. If you do not have the time or the competency, invest via ETF’s. I like the S&P 500 ETF’s.
Since 2016, NVIDIA’s revenue has grown by 29% per year. Maintaining a rate of 17% over the next decade (assuming its price-to-sales ratio remains unchanged), NVIDIA’s market cap would grow from ~$473 Billion to ~$2.2 trillion by 2031. The projected stock price is unknown, so DO YOUR HOMEWORK before investing your HARD-EARNED MONEY.
HAPPY HUNTING!
APPENDIX- MORNINGSTAR JUNE 14, 2021, ANALYSIS
Nvidia’s Growing Data Center Prowess Warrants a Wide Economic Moat; Raising FVE to $550
Abhinav Davuluri
Sector Strategist
Analyst Note | by Abhinav Davuluri Updated June 14, 2021
After taking a fresh look at our thesis on Nvidia, we are raising our moat rating to wide from narrow thanks to intangible assets related to the design of graphics processing units, or GPUs. Nvidia has focused on expanding opportunities for its GPU technology beyond PCs, which we think are making the firm’s intellectual property around GPU design increasingly valuable. Collectively, these applications represent multiple avenues for Nvidia to advance its IP and remain at the cutting edge for GPU technology and give us confidence in the long-term sustainability of the firm’s competitive advantages.
We are raising our probability-weighted fair value estimate to $550 per share from $515 as a result of the moat rating change. Nvidia is in the process of acquiring ARM, and if the deal closes, our fair value would increase to $600 per share. If the deal does not close, we assign Nvidia a fair value estimate of $500 per share, up from $465, as we as we anticipate excess returns over a longer period of time commensurate with a wide moat rating. Overall, our probability-weighted fair value estimate assigns a 50% probability of closing due to potential regulatory scrutiny and ARM customer pushback. Nvidia is paying a high multiple for ARM’s earnings, but given the GPU leader’s share price is trading at a significant premium to our updated stand-alone $500 fair value estimate, we like that Nvidia is using its rich shares to fund a large portion of the deal.
Nvidia is the leader in discrete graphics. We think the market has significant barriers to entry in the form of advanced intellectual property. To stay at the cutting edge of GPU technology, Nvidia has a large research and development budget compared with Advanced Micro Devices and smaller GPU suppliers, which allows it to continually innovate and fuel a virtuous cycle for its high-margin chips.
Business Strategy and Outlook | by Abhinav Davuluri Updated February 24, 2021
Nvidia is the leading designer of graphics processing units that enhance the visual experience on computing platforms. The firm’s chips are used in a variety of end markets, including high-end PCs for gaming and data centers. Traditional GPU uses include professional visualization applications that require realistic rendering, including computer-aided design, video editing, and special effects. Nvidia has experienced success in focusing its GPUs in nascent markets such as artificial intelligence (deep learning) and self-driving vehicles. Hyperscale cloud vendors have leveraged GPUs in training neural networks for uses such as image and speech recognition.
The linchpin of Nvidia’s current business is gaming. PC gaming enthusiasts generally purchase high-end discrete GPUs offered by the likes of Nvidia and AMD. Going forward, we expect the data center segment to drive most of the firm’s growth, led by the explosive artificial intelligence phenomenon. This involves collecting large swaths of data followed by techniques that develop algorithms to produce conclusions in the same way as humans. As Moore’s law-led CPU performance improvements have slowed, GPUs have become widespread in accelerating the training of AI models to perform a task. However, we think other solutions are more suitable for inferencing, which is the deployment of a trained model on new data. Today’s basic variants of AI are consumer-oriented and include digital assistants, image recognition, and natural language processing.
The firm views the car as a “supercomputer on wheels.” Although this segment currently contributes relatively little to the top line, we acknowledge the opportunity Nvidia has to grow its presence in cars beyond infotainment as drivers seek autonomous features in newer vehicles. Nvidia’s Drive PX platform is a deep learning tool for self-driving that is being used in R&D at more than 370 partners. More recently, Nvidia acquired Mellanox to bolster its data center offerings in the networking realm to raise switching costs and improve performance of Nvidia’s existing portfolio. In September 2020, the firm agreed to purchase ARM from SoftBank for $40 billion.
Economic Moat | by Abhinav Davuluri Updated February 24, 2021
We believe Nvidia has a wide economic moat stemming from its intangible assets related to the design of graphics processing units, or GPUs. The firm is the originator of and leader in discrete graphics, having captured the lion’s share of the market from longtime rival AMD. We think the market has significant barriers to entry in the form of advanced intellectual property, as even chip leader Intel was unable to develop its own discrete GPUs (despite its vast resources) and ultimately needed to license IP from Nvidia to integrate GPUs into its PC chipsets (though more recently Intel is vying to develop its own discrete GPU). To stay at the cutting edge of GPU technology, Nvidia has a large R&D budget relative to AMD and smaller GPU suppliers that allows it to continuously innovate and fuel a virtuous cycle for its high-margin chips.
Nvidia’s intangible assets originate with its popularization of GPUs in 1999, which could off-load graphics processing tasks from the CPU, thereby increasing the overall performance of the system. The firm has patents related to the hardware design of its GPUs in addition to the software and frameworks used to take advantage of GPUs in gaming, design, visualization, and other graphics-intensive applications. Additionally, the latest PC games typically require system software updates (drivers) that optimize the performance of GPUs. In our opinion, Nvidia tends to provide more reliable drivers for most games that allows gamers to take full advantage of its GPUs, while AMD is unable to match Nvidia in breadth and consistency of driver updates. Consequently, consumers have favored Nvidia’s GPUs for gaming, with the firm boasting over 80% share in the discrete GPU market, with little resistance from AMD at the leading-edge. In turn, this has enabled economies of scale that allow Nvidia to invest in designing chips at the latest process node while offering regular driver updates and remain at the forefront of GPU technology.
While the market for discrete GPUs in PCs somewhat stagnated, as most PCs utilize integrated graphics chips from Intel, Nvidia has benefited from a resurgence for high-end GPUs driven by the growing enthusiast PC gaming space. In our view, AMD has been unable to design products capable of competing with Nvidia’s GPUs at the high-end of the gaming spectrum. Consequently, Nvidia has gained share at the expense of AMD as gamers have moved from mainstream graphics cards to performance and enthusiast segments. We note these GPUs range from $150 at the low-end to over $1,000 for premium cards, with Nvidia’s gaming gross margins in the 60s. Nvidia has introduced ray-tracing technology in its latest gaming GPU offerings, which brings real-time, cinematic-quality rendering to content creators and game developers. Although virtual reality is another trend that should benefit Nvidia’s gaming GPUs, we think mobile VR applications will be more prominent relative to those on PC VR systems, at least in the near term.
Unlike gaming GPUs, which are dependent on the secularly declining PC market, Nvidia has taken steps to leverage its GPU prowess into other markets such as automotive and data center that represent a meaningful and sustainable growth opportunity. GPUs are being used to accelerate computation workloads with the goal of training AI systems to drive cars and perform medical diagnoses. We note these are computationally intensive endeavors that are more achievable with CPUs and GPUs working in tandem versus CPUs in isolation.
Internet behemoths such as Google, Facebook, Amazon, and Microsoft have found GPUs to be adept at accelerating cloud workloads that use deep learning techniques to achieve speech recognition (Siri, Google Now, Alexa, Cortana), photo recognition (identifying faces in pictures on Facebook, videos of cats on YouTube), and recommendation engines (Netflix and Amazon). To train a computer to recognize spoken words or images, it must be exposed to massive amounts of data with the goal of educating itself. Inference involves taking what the model learned during the training process and putting it into real world applications to make decisions (for example– after reviewing 10,000 cat pictures during training, is this next picture a cat?).
These examples are not very efficient to run on server CPUs (predominantly Intel’s Xeons) alone, as general-purpose CPUs consist of a few cores that are good at performing a wide array of tasks in a sequential manner. The training process is ideal for GPUs that have massively parallel architecture consisting of thousands of smaller cores designed for handling multiple tasks simultaneously. Nvidia has a first-mover advantage in the accelerator market, as it looks to drive AI adoption in both the cloud and on the road.
To bolster this data center strategy, Nvidia acquired Mellanox for its networking chip expertise and is in the process of trying to acquire ARM for $40 billion from SoftBank. We view the latter as an attempt by Nvidia to become the dominant AI platform provider, particularly in the data center, as we assume an ARM acquisition would primarily be devoted to Nvidia’s ARM-based server CPU aspirations. ARM is the de facto architecture in effectively every smartphone, and its low-power efficiency has the potential to result in a superior performance per watt metric relative to incumbent x86 Intel and AMD server CPUs. Should Nvidia be successful in acquiring ARM and realizing its goal of developing a server CPU based on ARM architecture (something both Broadcom and Qualcomm failed at), there is a strong potential for Nvidia to realize substantial revenue synergies in its data center segment. The firm also expects to leverage its GPU and AI IP into ARM’s massive IP trove and license said IP to ARM’s customer base that dominates the smartphone market. ARM was a wide-moat rated firm when we covered the standalone entity, and we believe it is likely this deal would enhance Nvidia’s moat even further.
Within automotive, Nvidia currently has a presence in the infotainment systems of millions of vehicles through its Tegra processors. While increasingly complex digital cockpit computers will become the norm, we note this is a highly competitive market, with Qualcomm, Intel, among others also offering competitive infotainment solutions, and we do not see any competitive advantage from Nvidia that warrants a moat just yet. However, with its Drive PX self-driving system, Nvidia hopes to carve a dominant position in the self-driving space. Should the firm’s autonomous platform win the lion’s share of self-driving business, we think Nvidia would strengthen its moat via superior intangible assets and switching costs. We view this opportunity as in the early innings, and while more than 370 OEMs have tested Drive PX in R&D settings, Intel (with the 2017 acquisition of Mobileye) represents a formidable opponent that will challenge Nvidia, in our view.
Fair Value and Profit Drivers | by Abhinav Davuluri Updated June 14, 2021
Our fair value estimate for Nvidia is $550 per share on a probability-adjusted basis, including a 50% probability that Nvidia closes its pending acquisition of ARM. Our fair value estimate with ARM would be $600, while our standalone fair value estimate for Nvidia is $500 per share if the deal were to be blocked or rejected. While ARM on its own is relatively valuation neutral for Nvidia, we assume significant revenue synergies for Nvidia’s data center and AI-related segments to justify the increase with ARM in tow.
Our standalone fair value estimate assumes a forward adjusted price/earnings ratio of 33 times. We do not believe the market is fully accounting for the competitive forces that we expect to challenge Nvidia. We project revenue will increase at a 18% compound annual growth rate through fiscal 2026 as the firm continues to diversify its revenue sources to areas of strong potential. Fiscal 2020 was a challenging year for the firm, as gaming revenue fell due to a cryptocurrency mining-related hangover and excess channel inventories, but we anticipate sales growth of nearly 50% in fiscal 2022, thanks to gaming, data center, and crypto-mining strength.
We think the data center segment will rise at a 25% CAGR through fiscal 2026. We expect the firm to dominate the training portion of deep learning, but we don’t believe the inference market will be as lopsided in favor of Nvidia’s GPUs as current valuation suggests. Gaming should continue to be a major source of revenue, though we think recent growth rates will be difficult to replicate due to saturation and lengthening replacement cycles of gaming GPUs and greater competition.
In automotive, most of Nvidia’s current sales are infotainment-related. We think Nvidia will capture a healthy portion of the self-driving opportunity, culminating in a 24% CAGR in automotive revenue through fiscal 2026, following a soft fiscal 2021 due to COVID-19.
Gaming currently accounts for over half of total sales and has a gross margin at the corporate average. The Tegra chip, used in automotive infotainment systems, is relatively lower. In contrast, the data center margins are high, ranging from 65% to 70%. We expect margins to remain in the low-60s. Nvidia must invest heavily in R&D to maintain its competitive edge in GPUs. Thus, we model long-term R&D as a percentage of sales around 20%, implying GAAP operating margins in the high 30s.
Risk and Uncertainty | by Abhinav Davuluri Updated February 24, 2021
The firm has benefited from strong PC gaming momentum in recent years. However, many of the most popular games are competitive multiplayer online games (esports) that require low-end discrete GPUs for latency reasons versus high-end GPUs for cutting-edge graphics. The firm is also expected to benefit from Virtual Reality, however, a shift to mobile gaming VR over PC VR could curb these opportunities, as Nvidia’s GPUs aren’t formidable in smartphones.
While Nvidia had generated most of its sales from gaming, its increasing data center presence for GPUs used in deep learning has helped propel the data center segment to a more equitable level. Nvidia has a first-mover advantage in chip solutions for AI and autonomous-vehicles, though its lead may not last if superior alternatives arise (other forms of acceleration for AI or other self-driving platforms). Also, the rate of disruption tends to be quicker in these markets that are very performance-sensitive. We note GPUs were designed to do one thing very well: render graphics for realistic images, games, videos, and so on. Leveraging GPUs in deep learning applications among other areas mostly occurred due to lack of better alternatives. As alternatives arise, Nvidia’s recent explosive growth will be difficult to sustain, in our view. Ultimately, the risky nature of Nvidia’s nongaming GPU segments leads to our very high uncertainty rating.
The acquisition of Mellanox and pending acquisition of ARM have the potential to significantly diversify Nvidia’s end-market exposure, and we suspect the firm will derive over half of revenue from the data center segment shortly, which could help mitigate some of the volatility Nvidia has faced in its gaming and cryptocurrency mining-related sales over the past few years.
We do not foresee any material environmental, social, or governance issues on the horizon. Perhaps the greatest risk is the potential scarcity of experienced chip design talent within the industry.
Capital Allocation | by Abhinav Davuluri Updated June 14, 2021
We assign Nvidia an Exemplary capital allocation rating, which reflects our assessment of a sound balance sheet, strong investments associated with the firm’s strategy and execution, and attractive and appropriate shareholder distribution policies.
Nvidia has a sound balance sheet along with a conservative financing policy. At the end of the first quarter of fiscal 2022, the firm held about $7 billion in total debt and nearly $12.7 billion in cash and cash equivalents, and marketable securities. We think the firm generates sufficient cash flow and has ample resources to meet its debt obligations, capital expenditure requirements, potential acquisitions, and shareholder returns.
CEO Jen-Hsun Huang cofounded Nvidia in 1993 after stints at LSI Logic and AMD. Colette Kress became CFO in September 2013, having previously worked with Cisco. Nvidia’s management team has shown a willingness to invest in new opportunities in the past several years outside the firm’s core PC graphics processor business. As a result, Nvidia has become a key player in the artificial intelligence accelerator market with its GPUs for AI training and inference workloads. The firm has also sought to drive the push toward autonomous driving with its Drive PX platform.
The firm has periodically made acquisitions in the past. One notable acquisition was the $367 million purchase of Icera in 2011, a baseband processor firm, to complement Nvidia’s foray into mobile devices. In May 2015, Nvidia wound down its Icera modem operations primarily because of its shift in strategy to focus on high-growth opportunities such as gaming, automotive, and AI acceleration instead of the cutthroat integrated application processor and modem markets for smartphones. We view this move as shrewd because it shows that management is willing to adapt when a particular venture isn’t performing as intended.
In March 2019, Nvidia announced it will acquire Israeli-based Mellanox Technologies for $6.9 billion or $125 per share in cash. Mellanox sells networking products that focus on efficient data transfer in data centers via its InfiniBand and Ethernet technologies for interconnects. We note there will be no initial revenue or cost synergies as the GPU titan intends to maintain all of Mellanox’s existing investments. We think this makes sense, as the deal rationale is initially to bolster Nvidia’s share of data center spend to potentially increase its switching costs. Nvidia’s DGX integrated system for Artificial Intelligence, or AI, utilizes InfiniBand technology while the two firms collectively power over half of the world’s Top 500 supercomputers with Nvidia GPUs and Mellanox interconnects. The deal closed in early 2020.
In September 2020, Nvidia announced it would acquire ARM from the SoftBank Group in a transaction valued at $40 billion. The company’s focus is to offer a comprehensive data center portfolio that includes ARM-based CPUs while leveraging Nvidia’s artificial intelligence expertise into ARM’s vast ecosystem spanning the data center to mobile and Internet of Things devices. Similar to SoftBank’s justification when it bought ARM, Nvidia expects to bolster ARM’s R&D budget to realize its data center vision. Based on the regulatory risk associated with this deal (the largest in chip history if it closes), we will likely assign a 50% probability of the deal closing. Nvidia is financing the deal via $21.5 billion in its common stock (44.3 million shares) and $12 billion in cash, which includes $2 billion payable at signing. Also, SoftBank may receive up to $5 billion in cash or common stock subject to ARM meeting certain performance targets, while Nvidia will issue $1.5 billion in equity to ARM employees for retention purposes. We like that Nvidia is using its rich shares to fund a large portion of the deal.
Regulatory risk (particularly from escalating U.S.-China tensions), potential pushback from major ARM licensees (including Apple, Qualcomm, and Huawei, among many others), and competitors such as Intel are formidable hurdles to the consummation of a deal, in our view. The deal isn’t expected to close for 18 months and although Nvidia had success in attaining regulatory approval from China for its Mellanox acquisition earlier in 2020, the magnitude and significance of this potential deal will undergo heightened scrutiny, in our view .
Management initiated a quarterly dividend in the fourth quarter of fiscal 2013 to return excess cash to shareholders, and it currently has a stock-buyback program. The firm returns cash to shareholders through ongoing quarterly cash dividends ($0.16 per share) and share repurchases.
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ABOUT ME
I am a proud nerd (as my beautiful wife and daughter have told me) investment and finance blogger with aN.C.C. State, Chemical Engineering, University Rutgers, MM.B.A.and Harvard University, Advanced Management education.
I left a corporate career because I desired to make a difference as a speaker and writer. I was blessed to be coached and mentored by strong women and men in my family and professional life. It is my time to serve and give back.
DISCLAIMER
I started my first business at ~13 years of age (a small but brilliantly created plant nursery). I am a successful investor in stocks, options, real estate and am happy to share my finance and investment lessons. I am NOT a licensed financial advisor. Please do not construe my suggestions on this blog as recommendations for your situation. As an investor, you must establish your risk/loss tolerance. Investment in any asset involves risk, including complete loss.
Please seek your licensed CC.P.A.or fiduciary financial advisors for individual financial advice.
I write this weekly blog to make an impact by reaching an audience and demonstrating the need for financial literacy. I will help you get there.
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