American multinational technology company NVIDIA (NVDA) seems to be aggressively focused on adding British microchip company Arm into its family. Its recently commissioned research, which was conducted by chip industry analyst Future Horizons, is an attempt to persuade authorities to approve its $40 billion acquisition bid for Arm.
As per the report, Arm is unable to deliver as per its potential due to a series of misplaced investments over the years by its current owner SoftBank. It claims that Arm is struggling to compete in major emerging markets such as data centers and connected cars, as its smartphone business reaches a growth stagnation.
NVIDIA’s rivals, who have opposed the acquisition bid saying that it could manipulate Arm’s open model, claim that the company should rather be floated than acquired. However, the Future Horizons report emphasizes the need for Arm to come in the hands of NVIDIA to be able to fund investments required to compete against American rivals. (See NVIDIA stock chart on TipRanks)
According to the report, “With stagnant revenues and no profits, time is not in Arm’s favor, and funding the required increased levels of R&D spending will clearly be a business and financial leap of faith.” Future Horizons added, “Arm does not have the financial firepower to self-fund this from revenues.”
On July 23, Argus analyst Jim Kelleher reiterated a Buy rating on NVIDIA, while increasing the price target to $230 from $175 (adjusting for the recent 4:1 stock split), implying 20.4% upside potential.
Kelleher noted that the demand for Nvidia’s data center and gaming solutions remain strong even as the pandemic shows signs of slowing down. Notably, the demand for these solutions had skyrocketed in the early days of the pandemic.
Moreover, NVIDIA’s automotive business had slowed with its shift in focus from infotainment to autonomous vehicle solutions, and then from the pandemic-led shutdown of car manufacturing units. Nonetheless, the analyst said that the automotive business now seems to be “on the cusp of a major growth phase.”
Consensus among analysts is a Strong Buy based on 28 Buys and 1 Holds. The average NVIDIA price target of $202.51 implies 5.6% upside potential to current levels.
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