Chip designer and GPU giant Nvidia (NASDAQ:NVDA) is due to report fourth quarter and full-year fiscal 2022 results after the bell on Feb. 16. Last November, the company delivered a record-setting, blockbuster quarter. Nvidia has delivered a positive earnings surprise every quarter since February 2019. It has only missed market expectations one time in the past 26 quarters. So why is NVDA stock down 13% year-to-date?
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There are many big issues that have been worrying investors in recent days. Factors like rising inflation, rising interest rates and the threat of war between Russia and Ukraine are weighing on the market. These concerns have been driving many tech stocks down through 2022.
But in the case of NVDA stock there’s another factor. The company’s much-hyped, acquisition of custom chip designer Arm is officially dead. With the deal (which was worth as much as $66 billion) off, should you stay away from NVDA despite its discounted price?
NVDA Stock and the Impact of the Arm Deal
When Nvidia announced its proposed acquisition of Arm in 2020, it set expectations pretty high. The deal was a big one, valued at $40 billion based on the price of NVDA stock at that time. The companies raised expectations by hyping the end result. In particular, they were pushing the competitive advantage the combined companies would have in artificial intelligence (AI): “The combination brings together NVIDIA’s leading AI computing platform with Arm’s vast ecosystem to create the premier computing company for the age of artificial intelligence, accelerating innovation while expanding into large, high-growth markets.”
This caught the attention of investors. A report released about six months after the deal was announced pegged the 2020 value of the global AI market at $62.4 billion. However, it projected a CAGR of 40.2% between 2021 and 2028. That put the value of the AI market by 2028 at just under $1 trillion. Nvidia and Arm were two of the biggest players identified in the report.
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Putting Nvidia’s GPU expertise (graphics chips run in parallel provide the computing muscle for AI and machine learning) together with Arm’s track record of producing custom processors for a huge range of applications should have resulted in a company that brings in an even larger share of that AI revenue than the two companies would individually. That’s the premise that excited investors about the deal.
That and the additional revenue Nvidia would gain from all of Arm’s work for a who’s who of the tech industry. Some of the hottest-selling tech products in history (including the iPhone) run on system-on-chip processors that use Arm architecture.
Unfortunately for Nvidia, the deal was called off last week. There was simply too much resistance from regulators in the U.K., the U.S. and the E.U. Not surprisingly, news that it had been called off hit NVDA stock.
Is Nvidia’s Long-Term Case in Trouble Now?
I can’t argue the fact that a Nvidia that owned Arm would have been formidable. A new world of custom chips would have opened up. Nvidia would have been able to expand into CPU development in addition to its current GPU business. There’s no doubt there would have been significant upside for NVDA stock.
However, even without Arm, Nvidia remains formidable. Its graphics cards are snapped up the second they become available, its GPUs are powering AI solutions, and the company is killing it in the data center business. Nvidia’s custom chip business includes powering must-have portable game consoles.
Don’t forget the metaverse. As I wrote in January, whatever ends up happening with metaverse, Nvidia will be a big part of it. Bringing virtual worlds to life requires massive investments in parallel-processing GPUs and data centers. Both are Nvidia strong suits.
Bottom Line on NVDA stock
Did the failure of the Arm deal to materialize change the mind of investment analysts on NVDA stock? Hardly.
Checking with the Wall Street Journal, the consensus rating for NVDA remains “overweight.” The only difference compared to a month ago among the rankings of the 44 analysts who were polled, is that one has downgraded NVDA from “hold” to “underweight.” The majority — 28 analysts — continue to have a “buy” recommendation, and six continue to have shares rated as “overweight.” The average price target of $345.87 offers a whopping 32% upside.
NVDA stock currently scores a “B” rating in Portfolio Grader. That rating plus its currently discounted price makes NVDA a pretty solid pick.
If you’re thinking of pulling the trigger, you may want to act quickly, though. Remember, Feb. 16 is Nvidia’s earnings date. With the company’s track record of beating market expectations, there’s a good chance you’re going to see shares spike in value once Nvidia posts its numbers for the quarter.
On the date of publication, Louis Navellier had a long position in NVDA. Louis Navellier did not have (either directly or indirectly) any other positions in the securities mentioned in this article. InvestorPlace Research Staff member primarily responsible for this article did not hold (either directly or indirectly) any positions in the securities mentioned in this article.
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