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Nvidia Wants a Helping ARM

With its $40 billion bid, the chipmaker looks to corner the AI market.

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After reflecting on Nvidia’s (NVDA) announcement that it plans to acquire ARM from SoftBank in a transaction valued at $40 billion, we foresee nice potential revenue synergies in the data center and the leveraging of Nvidia’s graphics processing unit and artificial intelligence intellectual property into ARM’s treasure trove of IP.

We have raised our fair value estimate for narrow-moat Nvidia to $300 per share on a probability-weighted basis. Should the deal go through, our fair value estimate for the combined company would be $350 per share. However, based on the regulatory risk associated with this deal--the largest in chip history if it closes--we assign a 50% probability of the acquisition closing. If the deal does not close, our stand-alone fair value estimate for Nvidia would probably remain at $250, all else equal. We believe that from a valuation perspective, Nvidia is paying a high multiple for ARM’s earnings. But given that the GPU leader’s share price is trading at a significant premium to our stand-alone $250 fair value estimate, we like that Nvidia is using its rich shares to fund a large portion of the deal.

Abhinav Davuluri does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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