Nvidia’s proposed $40 billion acquisition of Cambridge-based Arm is in trouble. On Monday, the UK’s Secretary of State issued an intervention notice on behalf of the UK Government citing national security interests.
In September 2020, the $40 billion acquisition of Arm from the SoftBank Group was presented by Nvidia (NVDA) with the intention of building an artificial intelligence (AI) supercomputer powered by the two companies. The deal would allow Arm to expand its intellectual property (IP) licensing portfolio using Nvidia technology. Arm has shipped over 180 billion microprocessor chips to-date.
The UK Government’s intervention notice stated, “Whereas the Secretary of State believes that it is or may be the case that a public interest consideration is relevant to a consideration of the relevant merger situation. Now, therefore, the Secretary of State in exercise of his powers under section 42(2) of the Act hereby gives this intervention notice.”
“The Secretary of State believes that it is or may be the case that the interests of national security, being a public interest consideration specified in section 58(1) of the Act, are relevant to a consideration of the relevant merger situation.”
The notice also asks UK’s Competition and Markets Authority to investigate the merger and compile a report by July 30. (See Nvidia stock analysis on TipRanks)
According to a CNBC report, UK’s Digital Secretary Oliver Dowden from the Department for Culture, Digital, Media and Sport said, “As a next step and to help me gather the relevant information, the U.K.’s independent competition authority will now prepare a report on the implications of the transaction, which will help inform any further decisions.”
Following the intervention notice, Rosenblatt Securities analyst Hans Mosesmann reiterated a Buy and a price target of $800 on the stock. Mosesmann said in a note to investors, “This intervention is a surprise to us, and given ARM's headquarters and ancestral foundings in the U.K., it carries significant weight that could sway other key countries, including China, to also vote against or intervene against the deal.”
“Our own position has been that the deal was a 50-50 proposition, and given last week’s sudden announcement of Grace, Nvidia's Plan B CPU roadmap without the ARM acquisition is on the table. We continue to like the Nvidia story and, despite this intervention, this does not deter against the longer term story of AI and accelerated computing being the path forward and the next cycle,” Mosesmann added.
Meanwhile, Nvidia scores a Strong Buy consensus rating from the analyst community. That’s based on 22 analysts recommending a Buy and 4 analysts suggesting a Hold. The average analyst price target of $670.20 implies 9.1% upside potential to current levels.
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Semiconductors are one of the modern world’s essential industries, making possible so much of what we rely on or take for granted: internet access, high-speed computers with high-speed memory, even the thermostats that control our air conditioning – there isn’t much, tech-wise, that doesn’t use semiconductor chips.
The global semiconductor chip market was valued at over $513 billion in 2019, and despite the worst the pandemic could do, the chip sector rose to $726 billion in 2020. It’s a market based on a near-limitless customer base; it’s estimated that 2.5 billion people own at least one smartphone. That’s 1 in 3 of the total world population, enough to ensure that demand for semiconductor chips will never slacken.
And with that background, Raymond James analyst Chris Caso sees two chip giant poised to make gains this year – but one that investors should avoid. Let's take a closer look.
Advanced Micro Devices (AMD)
The first chip stock we’ll look at, AMD, is consistently ranked among the top 20 largest chip makers – by sales – globally. The company held the fifteenth spot last year, with $9.76 billion in total revenues. That top line was up 45% from 2019, when AMD was ranked eighteenth. AMD’s position in the industry is based on its high-quality products, including microprocessors, motherboard chipsets, and graphics processors. AMD’s Ryzen Mobile 4000 chip was the first 7nm x86 processor on the market.
The chip company showed a solid second half in 2020, with revenues in Q3 and Q4 rapidly recovering the 1H20 dip and rising above 2019 level. Earnings in Q4 skyrocketed, growing from Q3’s 32 cents per share to an impressive $1.45 per share. For all of 2020, earnings came in at $2.06, compared to 30 cents for 2019. The strong second half pushed the full-year revenue to a company record, on the strength of expanding demand in the PC, gaming, and data center markets.
AMD’s prospects have attracted Raymond James’ Chris Caso, who compares the company favorably to competitor Intel.
“We are using the pullback since the start of the year to get involved with AMD, which we expect to be a secular winner due to what we believe to be a durable technical advantage vs. Intel. We think the stock’s pullback has been driven by improved sentiment that Intel will solve their manufacturing challenges, which will reverse AMD’s successes. We’re taking the other side of that view," the 5-star analyst noted.
Caso continued, "Nowthat Intel has committed to internal manufacturing, we think it’s unlikely that Intel ever regains a transistor advantage vs. AMD, and the current roadmaps ensure an advantage for AMD/TSMC through at least 2024. In the meantime, we think Street numbers are too low for both server and consoles, putting our base case 2022 EPS estimate of $2.81 12% ahead of the Street, with an upside case to about $3.00."
In line with this outlook, Caso initiated coverage of AMD with an Outperform (i.e. Buy) rating, and $100 price target to suggest a 23% one-year upside potential. (To watch Caso’s track record, click here)
The Raymond James view is no bullish outlier; AMD has 13 positive reviews on record. These are partly balanced by 5 Holds and 1 Sell, making the analyst consensus rating a Moderate Buy. The share are selling for $81.11, and their $104.44 average price target implies an upside of ~29% for the next 12 months. (See AMD stock analysis on TipRanks)
Nvidia Corporation (NVDA)
Next up, Nvidia, is another of the chip industry’s giants. Like AMD, Nvidia is slowly rising in the rankings; going by total sales, the company was rated number 10 in 2019 – and number 8 in 2020. Nvidia’s sales last year totaled more than $16 billion, a gain of 53% year-over-year. Nvidia rode to its success on the combination of memory chips – which have a strong market in the data center segment – and graphics processors – which are popular among both hardcore gamers and professional graphic designers.
For the most recent quarter, Q4 of fiscal 2021, ending on December 31, Nvidia reported $5 billion in revenue, a company record, and a 61% gain from the year before. EPS rose from $1.53 in the prior Q4 to $2.31 in the current print, a gain of 51%. Full year numbers were strong; the $16.68 billion at the top line was a record, and the EPS, at $6.90, was 53% higher than the previous year.
Company management noted the strength of the data center segment, but also pointed out that Nvidia has a growing AI business. The company makes between 5% and 10% of its total sales in the automotive market, and more than half of that is AI-related, in the autonomous vehicle niche.
Raymond James’ Chris Caso notes this, too, in his report upgrading his stance on NVDA.
“Our call is not really new, as we’ve been positive on NVDA for some time. Our call rather is meant to express our conviction in both the short and long term. In the short term, we think NVDA results will be more dependent on supply than demand given widespread shortages – and we do expect incremental supply as the year progresses…. Our longer term conviction is driven by the fact that NVDA has more shots on goal than anyone else in our coverage, and their success in AI has earned them a permanent seat at the table in both hyperscale and enterprise compute,” Caso opined.
Caso bumps his stance up from Outperform to Strong Buy, and sets a price target of $750. At current levels, this indicates room for a 17% one-year upside.
NVDA’s strong share appreciation over the past 12 months (115%) has pushed the stock price close to the average price target. Shares are selling for $614.47, with an average target of $670.20 suggesting room for 9% growth. Nonetheless, the stock holds a Strong Buy consensus rating based on 22 Buys and 4 Hold given in recent weeks. (See NVDA stock analysis on TipRanks)
Intel Corporation (INTC)
The third stock we’re looking at, Intel, is the one that Raymond James says to avoid. This may seem counterintuitive; Intel is, by sales, the world’s largest semiconductor chip maker, with more than $77 billion in annual revenue last year and a leading position in a $720+ billion market. So why does Caso advise caution here?
“Intel’s stock has risen of late due to optimism that new leadership from their very capable new CEO will allow them to turn around their manufacturing issues and return to their former dominance. Our Underperform rating reflects not just the risk that Intel won’t reach that goal, but also the pain they will likely endure in pursuit of that goal in terms of capex, lost market share, and a shifting landscape in datacenter that will make the industry less dependent on Intel," Caso explained.
The analyst added, "In addition, we’re concerned that demand in the PC market, on which Intel remains highly dependent, has been significantly pulled forward due to the pandemic, and expect an eventual mean reversion – which may unfortunately occur just as Intel needs to ramp investment.”
Caso, as noted, rates INTC an Underperform (i.e. Sell), and does not put a price target on it.
All in all, the market’s current view on INTC is a mixed bag, indicating uncertainty as to its prospects. The stock has a Hold analyst consensus rating based on 12 Buys, 10 Holds, and 8 Sells. Meanwhile, the $67.68 price target suggests a modest upside potential of nearly 6%. (See INTC stock analysis on TipRanks)
To find good chip ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.
Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
