Nvidia Shares Jump 6% on Deal with SoftBank to Buy UK Chipmaker Arm; Target Price $600

Nvidia Corp, an American multinational technology company, announced to acquire UK-based chip designer Arm Limited from SoftBank in a transaction valued at $40 billion, sending its shares up about 6% in pre-market trading on Monday.

Under the terms of the transaction, NVIDIA will pay to SoftBank a total of $21.5 billion in NVIDIA common stock and $12 billion in cash, which includes $2 billion payable at signing. The number of NVIDIA shares to be issued at closing is 44.3 million, determined using the average closing price of NVIDIA common stock for the last 30 trading days, the company said.

Additionally, SoftBank may receive up to $5 billion in cash or common stock under an earn-out construct, subject to satisfaction of specific financial performance targets by Arm. NVIDIA will also issue $1.5 billion in equity to Arm employees.

SoftBank will remain committed to Arm’s long-term success through its ownership stake in NVIDIA, expected to be under 10%.

Nvidia’s shares rose about 6% to $514 in pre-market trading on Monday; the stock is up over 100% so far this year. Also, the SoftBank ended 8.96% higher at JPY 6,385 in Tokyo.

Executive comments

“AI is the most powerful technology force of our time and has launched a new wave of computing,” said Jensen Huang, founder and CEO of NVIDIA.

“In the years ahead, trillions of computers running AI will create a new internet-of-things that is thousands of times larger than today’s internet-of-people. Our combination will create a company fabulously positioned for the age of AI.”

Nvidia stock forecast

Twenty-nine analysts forecast the average price in 12 months at $546.00 with a high forecast of $650.00 and a low forecast of $260.00. The average price target represents a 12.21% increase from the last price of $486.58. From those 29 equity analysts, 24 rated “Buy”, four rated “Hold” and one rated “Sell”, according to Tipranks.

Nvidia had its price target raised by investment analysts at Royal Bank of Canada to $610 from $528. The brokerage currently has an “outperform” rating on the computer hardware maker’s stock. Jefferies raised their target price to $680 from $570.

Other equity analysts also recently updated their stock outlook. At last, Rosenblatt Securities increased their price target to $600 from $500 and gave the stock a “buy” rating. BofA Global Research upped their price objective to $650 from $600, UBS raised target price to $625 from $528, Benchmark increased their target price to $600 from $540, Goldman Sachs raised their target price to $585 from $528 and Mizuho upped their target price to $575 from $520.

We think it is good to buy at the current level and target $600 as 100-day Moving Average and 100-200-day MACD Oscillator signal a strong buying opportunity.

Analyst views

“We view the deal as transformative, positioning Nvidia (NVDA) not just to capture 80% of the ecosystem value in the data center, but also unify the compute ecosystem between the edge and data center. We think the merged company has a 5-year EPS power of $50, and increase our price target to $680, and bull-case to $1,000,” said Mark Lipacis, equity analyst at Jefferies.

“We model Nvidia Data Center processor revenues of $34 billion in 2025, and Data Center Ecosystem (software) of an additional $34 billion,” Lipacis added.

Upside and Downside risks

Upside: 1) Nvidia (NVDA) successfully acquires and integrates ARM expanding its data center TAM and controlling 80% of the DC ecosystem and unifying compute ecosystem from the edge to data centers. 2) Accelerated growth in Deep Learning applications across multiple end markets. 3) Conversational AI demand increases at a faster than expected rate, driving demand for NVDA solutions in the data center. 4) Accelerated growth from Automotive with proliferation of autonomous cars GPU upgrades and incremental demand driven by virtual reality applications. 5) Five-year Non-GAAP EPS: $50; P/E: 20x; Price target: $1000, highlighted by Jefferies.

Downside: 1) NVDA ARM deal is blocked by regulatory authorities. 2) COVID-19 outbreak extends beyond 2020 causing greater than expected demand destruction and supply chain constraints. 3) Slowing Datacenter capex spending. 4) Slower than expected sales of Automotive products. 5) Adoption challenges with GPU Accelerators in the Data Center. 6) Emerging competitive threats from INTC, AMD and other startups. 7) C2021E Non-GAAP EPS: $9; P/E: 44x; Price target: $400.

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