Nvidia is not getting ARM: So what now?

Back in September 2020, American technology giant Nvidia (NVDA) and the leader in designing graphics processing units (GPUs) announced their plans to take over Arm Ltd. – the British semiconductor design firm behind the CPU architecture of the same name (ARM) found in nearly all lower powered technology, like mobile phones and IoT.

This was a huge deal for the company as it would immediately strengthen their ambitious efforts in the datacenters and AI – but likewise problematic as all other players in the industry rely on the open licensing deals provided by Arm to design their own chips. Because of this the deal came under heavy regulatory scrutiny and today Bloomberg were first to report that Nvidia is backing down and abandoning the bid.

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Too much power in one place

It is no secret that the deal carried controversy from the start. Already back in February the following year, Microsoft (MSFT), Alphabet (GOOGL) and Qualcom (QCOM) protested the deal. While Nvidia’s CEO Jensen Huang pledged that he would not change Arm’s open licensing model, its competitors argued that they would not be incentivized to do so, after paying $40 billion for the company. As I have raised in prior publications on this site – the ARM architecture is becoming ever more important. Qualcom’s chips are inside the vast majority of the world’s smartphones and all of their designs are built on top of ARMs licenses. Microsoft and even Amazon (AMZN) are working on their own ARM-based chips for their datacenters/cloud services and Google recently released their first in-house smartphone chip in the Pixel 6. And while Apple (AAPL) managed to be silent on the takeover situation, their recent revolution in power and efficiency can be attributed to them ditching Intel and moving to the same architecture that powers their phones: namely that of ARM.

Apple’s M1 lineup stands as a perfect example of where the industry is heading. These ARM-based SoCs designed in-house have clearly shown that the architecture is ready for prime time.

There is inherently nothing stopping Nvidia from just continuing Arm’s licensing deals and still benefit from it after a takeover – After all that does sound like a good enough reason to buy them out, given their widespread success and adoption. However, it also gives them a huge competitive advantage in two key areas:

  1. Nvidia would have access to new generational ARM designs before anyone else.
  2. Nvidia would be in a much stronger position when negotating deals in general as many of their customers depend on ARM at their very core.

As an example, Tesla (TSLA) currently uses Nvidia’s GPUs for training their self-driving software on supercomputers, but have AMD powering their latest in-car infotainment system. And as Tesla is now designing their own in-house chip to replace those of Nvidia for their Dojo supercomputer project, someone like AMD may be worse off in negotiating supply for other areas of Tesla’s business. And with Nvidias ambitions to provide a platform for autonomous vehicles, competing chip suppliers for the car industry could face immense pressure in this context.

Tesla’s Dojo chip powering the next potentially most powerful supercomputer in the world.

It would also mean that Nvidia would make a huge leap towards offering in their own compelling CPUs and start directly competing even closer with their peers – Advanced Micro Devices (AMD) which currently differentiates themselves by offering a complete solution (GPU + CPU) and Intel (INTC) that are moving into the space from the opposite direction. I have mentioned this oppotunity for Nvidia before specifically within the datacenter space, but it should be noted that this oppotunity still lies before them, even as the Arm deal falls through, exactly because of the open nature of how Arm currently operates.

Ultimately though, the deal failed regulatory approval. In China, the deal faced critism from the start as the collapse of Huawei’s mobile business has left its marks. They are certainly not interested in any more vital technology falling into American hands and have too enjoyed Arm’s unbiased reputation. In November 2021 the UK intensified its efforts in scrutinizing the deal and in early December what was likely the final blow was delivered: The FTC sued to block the semiconductor merger. From that point onwards the dream was probably over.

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So what happens now?

When I picked up some shares of Nvidia in September 2020, you may from the timing understand that I did so because of the takeover announcement and you would be absolutely right. Rumors had been flowing around the deal for months and I had considered jumping in for a while. I had picked up the leader in semiconductor manufactuing TSMC (TSM) just a month prior and were looking to diversify my exposure to the market to a chip designer as well. Interestingly I knew Nvidia well long before then and have used their products and services for years. I even considered them as one of my very first investments 8 years ago when I got started, but chose Microsoft (MSFT) over them. Although back then, it was on an entirely different basis: I simply thought their oppotunity to be great in an increasing market of gaming, I had not even remotely considered their oppotunities in AI and datacenters. Alas I missed the train back then and have kept my eye on the stock all this time.

But for that very same reason I was hesitant to go in when rumors of the deal were at its peak – I simply thought it too good to be true. And so it was not until Nvidia came out with the announcement themselves that I finally pulled the trigger. Despite the latest news and a current market correction I am up over 80% in this short time and whether I like it or not I have come to love this company and its innovative nature. That also means that while the deal was my original reason for entering back then, I will not be letting go of my shares. As always when I become a shareholder in a company that interests me, that interest grows and my curiosity leads me to learn new things. In the time I have held the stock I have become much more educated on oppotunities that lies ahead of Nvidia and decisively more bullish. Nvidia has a bright future ahead and is lead by one of the best CEOs in the world. Graphics intensive tasks are growing to much more than just gaming and the machine learning and artificial intelligence training oppotunities are vast. With Nvidia’s peak into CPUs as well I think they will come to dominate in datacenters and automotive vehicles.

Jensen Huang, Nvidia CEO wearing his iconic leather jacket and holding up a flagship graphics card.

But aside from the consequences of the deal falling through for my own sake, I do have some more general takes on it as a whole. If you visited any hardware forum in December, following FTCs decision to block Nvidia from taking over Arm, you would see in large part people expressing joy. That is because many enthusiasts had long taken issue with the same points as Nvidia’s competitors have and worried about Arm’s neutrality going forward. But while I to a large degree associate myself with these people and generally share this opinion, there is one place where I take issue: Where will Arm end up now? In my (as-unbiased as possible) view Nvidia would have been one of the better places it could have landed. My biggest personal concern would be the China-angle, as I certainly was not a fan of how Huawei were taken down by American brigade and am an advocate for for just how innovative Chinese technology companies are. With my investment in Xiaomi (HK1810) that of course becomes even more relevant.

But the thing is that right now Arm is actually under ownership of the Japanese conglomorate SoftBank (TYO9984) and has been since 2016. I would not have much issue with that continuing to be the case, however SoftBank have expressed that they are looking to get rid of Arm after a series of disappointing investments elsewhere. And so, now my biggest fear is actually that Arm should end up as a public company. If SoftBank are to raise a public offering for Arm, I worry that its somewhat higher cause of providing the world with open semiconductor designs for companies to create amazing chips with will be undermined. I believe it may eventually lead to a shift in the focus of the company, entirely streamlined towards making a profit for whoever ends up owning shares of the company. I understand how that may come off as ironic – that is after all what all of us are here for, but to me Arm is different and extremely important to the world.

As a final note I leave you with you with just how wrong things can go with mismanagement of this company – I present to you the tech heist of the century – When Arm China went rouge.

The original article can be found here. Quite an interesting story.

Disclaimer: I am not a financial advisor, the opinions expressed in this article are entirely my own – always invest at your own risk.

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3 Comments

  1. Henrik says:

    Exciting post. Thank you for summarizing and sharing

    Like

  2. joeltippar says:

    I think this is a great case for your portfolio like the denmark guy you are. 😀

    https://www.stockpixinvesting.com/insights-archive/huscompagnietq4update

    Like

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