The Nvidia (NASDAQ: NVDA) share price is a US stock success story. In mid-2015, the microchip specialist was a penny stock by US standards, trading for under $5 a share. On 29 November 2021, it had made a modest gain of 6,580%, reaching a record $334. By comparison, the NASDAQ Composite Index rose roughly 200% over the same timescale.

Nvidia’s core product, semiconductors (or microchips) are often likened to the ‘brain cells’ of a computer, as the nucleus is to a biological cell. And record demand for the technology is set to continue. However, Nvidia was trading for only $116 as recently as March. And in the past three weeks, it’s fallen 12% to $294, as its proposed multi-billion-dollar takeover plan for UK rival Arm comes under fire.

Nvidia share price: just out of Arm’s reach

Nvidia first expressed an interest in taking over its privately held rival in September 2020. The move was met with immediate national security and anti-trust opposition. Arm’s cutting-edge energy-efficient chip architectures are used in 95% of smartphones worldwide. Moreover, the company is widely viewed as a showpiece for the UK technology sector. And since Nvidia’s first proposal, Arm has nearly doubled in value from $40 billion to $75 billion in a little over a year.

After finding ‘significant competition concerns’ during its initial investigations, the UK’s Competition and Markets Authority (CMA) has begun a full ‘phase 2’ probe into the proposed merger. And the European Commission (EC) has also launched its own investigation, with EC Executive Vice President Margrethe Vestager commenting that ‘the acquisition of Arm by Nvidia could lead to restricted or degraded access to Arm’s IP, with distortive effects in many markets.’

But it’s the US Federal Trade Commission (FTC) that has truly sent both companies back to the drawing board. Bureau of Competition Director Holly Vedova said she wanted to stop the ‘largest semiconductor chip merger in history to prevent a chip conglomerate from stifling the innovation pipeline for next-generation technologies.' Calling Arm the ‘Switzerland’ of chipmakers, the FTC is suing Nvidia as it believes the deal would ‘allow the combined firm to unfairly undermine Nvidia’s rivals.’

With all three regulators against the takeover in its current form, it’s hard to see how it could continue. But there were no issues when Arm was bought by Japanese giant SoftBank for $32 billion in 2016. And if SoftBank CEO Masayoshi Son is right in believing that the deal will eventually go through, the Nvidia share price could skyrocket.

Money, money, money

In Q3 results last month, Nvidia reported record revenue of $7.1 billion, up 50% compared to the same quarter last year, and 9% quarter-over-quarter. This allowed the company to pay out quarterly dividends of over $100 million. This performance was largely driven by its best-ever gaming and data centre results.

CEO Jensen Huang said that ‘demand for Nvidia AI is surging, driven by hyper-scale and cloud scale-out, and broadening adoption by more than 25,000 companies. NVIDIA RTX has reinvented computer graphics.’ Further ‘Omniverse was a major theme…(which) brings together NVIDIA’s expertise in AI, simulation, graphics and computing infrastructure. This is the tip of the iceberg of what’s to come.’

But Nvidia will face stiff competition from competitors Intel and AMD. The shortage of microchips means that the demand for skilled workers is higher than ever — and in good news for employees, this means pay rises. Intel is spending $2.4 billion next year on staff salaries, comprised of $1 billion in cash and a further $1.4 billion in shares, to help ‘win the fierce battle for talent in today’s competitive market.’ Its 110,000-strong workforce will receive an average raise of $21,000 per year, and Nvidia will likely be forced to compete financially for workers.

But as the microchip shortage continues, Huang told investors that Nvidia had ‘secured guaranteed supply, very large amounts of it, quite a spectacular amount of it from the world's leading foundry.’ Perhaps that’s why UBS analyst Timothy Arcuri made Nvidia one of his ‘top picks’ for 2022.

While the Arm takeover may be on hold for now, the Nvidia share price could continue its bull run into 2022.

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Charles Archer | Financial Writer, London
24 December 2021