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NVIDIA Stock Is Cheap and Arm Is a Big Deal

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NVIDIA (NVDA - Free Report) has finally put all rumors to rest with the confirmation that its offer to acquire Arm for $40 billion in cash and shares has been accepted by Softbank.

This of course is a very big deal in dollar terms but perhaps even more so in terms of what it could mean for the computing future of the world. CEO Jensen Huang’s words say it all: “We’re uniting Nvidia’s leading AI computing with Arm’s vast ecosystem.”

Even if we don’t know what exactly AI means, there’s been enough coverage in the media for us to figure out that it’s part of a big effort to do millions of computations (both quantitative and qualitative) just as the human brain does in order to arrive at different decisions. And of course if we really want machines to do all the stuff we don’t feel like doing, they have to be able to make these decisions. That’s artificial intelligence or AI in a nutshell.

Of course, we need very powerful machines because there are so many computations to do. And if we want them in phones, washing machines, cars, thermometers, homes and a thousand other places, it stands to reason that these machines can’t be very big in size. After all there’s a question of convenience. And also aesthetics.

This is where chip companies like NVIDIA and Arm (which Softbank held for just around four years) play a big role. Arm architecture and designs are used to make chips in all things mobile and IoT. And NVIDIA has developed the AI tech that’s used to do many of these computations in the information infrastructure that we’ve come to know as the “cloud.”

So its goal is to take what has so far had limited application and spread it out all over the place. And it’s going to use the Arm vehicle to do it. If it’s successful, it would be a tight ecosystem of NVIDIA tech from the cloud and stretching to the smallest gadget in our hands.

That’s probably why its biggest hurdle is likely to be regulatory approval, which it must obtain from the U.S., EU, China and the UK (where Arm will continue to be headquartered). NVIDIA is saying that it will continue to license ARM designs to all the companies that use it, a list that includes Qualcomm (QCOM - Free Report) and Apple (AAPL - Free Report) . So you can just see how complicated the approval process might be. No wonder it has given itself 18 months to do it.

NVIDIA has gone from strength to strength and has taken the share price with it. In 2020, it was further boosted by the sudden and universal need to go digital.

After it topped the Zacks Consensus Estimate by 12.4% in the last quarter, all of the 12 analysts polled by Zacks raised their 2020 and 2021 estimates. This again sent the Zacks Consensus for the two years up a respective 14.6% and 13.5%.

Therefore earnings for the two years are now expected to grow 56.3% and 20.7%, respectively, on revenues that will grow a respective 44.8% and 17.4%. These numbers are pretty hard to beat!

So as may be expected, share prices kept soaring until they encountered September. And they’ve been declining the last few days.

And believe it or not, the shares are now trading at a PEG of 2.64X, which is below the median value of 2.92X over the past year, suggesting undervaluation.

So what are you waiting for? Grab NVDA shares today!

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