Lowering Fair Value Estimate on Nvidia Stock

On Feb. 7, Nvidia NVDA and SoftBank announced the termination of Nvidia's acquisition of ARM from SoftBank due to significant regulatory hurdles. Regulators in the U.S., U.K., and E.U. have been concerned the combination would be anticompetitive. Specifically, due to the importance of ARM technology in nearly every smartphone and increasingly other compute applications, Nvidia's ownership of ARM could have lead to higher prices or curb innovation for future technologies. We suspect major ARM customers such as Qualcomm, Microsoft, Apple, and others were also opposed to the deal, as it threatened ARM's status as a relatively independent and vital cog in the broader semiconductor ecosystem. SoftBank will receive a break-up fee of $1.25 billion, and the technology conglomerate will re-IPO ARM. We are lowering our fair value estimate for wide-moat Nvidia to our standalone fair value of $187 per share (from $194 per share on a probability-adjusted basis). Shares look overvalued at current levels. The initial timeline for Nvidia to receive regulatory clearances in the U.S., U.K., E.U., China, and other jurisdictions was roughly 18 months (i.e., early 2022). We had been fairly skeptical of the deal going through and are not surprised that Nvidia balked at the increased scrutiny. However, we don't think Nvidia's future prospects are greatly curtailed without ARM. Nvidia's GPU dominance in gaming and data centers remains unparalleled, and it can easily license ARM designs for its future server CPU aspirations without having to acquire ARM. The firm already licenses ARM designs for parts of its self-driving platform, Nintendo Switch chips, Mellanox networking products, data processing units, and upcoming server CPUs. Owning ARM could theoretically have given Nvidia an unfair edge in the markets these chips are sold into.

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