The Nvidia [NVDA] share price reached a record high of $346.47 during intraday trading on 22 November last year, but since then has fallen roughly 30% to Friday’s closing price of $239.49. This year alone, Nvidia’s stock is down around 20%, mainly due to concerns over the company’s failed $40bn bid to buy Cambridge-based chip designer Arm from Japan’s Softbank. However, as Nvidia prepares to report its Q4 results on Wednesday, does the dip in the Nvidia share price represent an opportunity for traders?
Nvidia share price drops on failed Arm bid
In a joint statement last Tuesday, Nvidia and Softbank said that the Arm deal had been scrapped due to “significant regulatory challenges”. Nvidia’s shares ended the week down 1.8%.
Although SoftBank will keep the $1.25bn deposit that Nvidia had paid towards the deal – meaning that Nvidia has squandered a sum equal to roughly 4% of its projected revenue for the financial year ahead – Nvidia’s prospects remain bright, and the company is likely to continue to cooperate closely with Arm owing to the latter’s strategic importance in the global chip industry.
Grounds for optimism ahead of Nvidia’s Q4 results
Estimates suggest that Nvidia is poised to report strong growth in Q4 revenue. According to data from Zacks Investment Research, analysts expect Q4 2021 revenue to be between $7.4bn and $7.55bn, with a consensus estimate of $7.43bn. The latter figure represents a 48.5% increase compared to Q4 2020. Earnings are expected to rise 56.4% year-on-year to a consensus of $1.22 a share.
The consensus revenue estimate is in line with the company’s own forecast, as Nvidia said it expects Q4 revenue of $7.4bn, give or take 2%, with gross margins of between 65.3% and 67%.
Meanwhile, MarketBeat data shows that Nvidia stock has a consensus ‘buy’ rating, based on 29 analysts polled by the platform. The Nvidia share price has a consensus target of $329.04, implying an upside of 37% from its 11 February closing price.
Like other chipmakers, Nvidia has benefitted in recent months from increased demand for semiconductors amid a global supply shortage. In the wake of its impressive Q3 numbers, which covered the three months to the end of October and were released on 17 November, Nvidia’s share price hit record highs. The company blew past expectations on revenue and profits, and posted a bullish outlook for Q4.
Revenue totalled $7.1bn in Q3, up 50% year-on-year, driven by strong demand for its graphic cards and data centre services. Gaming revenue rose 42% to $3.22bn, while a 55% rise in sales of high-spec chips for AI tasks saw revenue in this growing area of the business rise by over $1bn to $2.9bn. Looking ahead, the launch of a new suite of chip products – Nvidia’s Omniverse platform – is expected to drive revenue growth in the coming quarters.
Arm wrestle called off
Nvidia’s $40bn takeover of Arm collapsed after the deal became mired in regulatory and legal issues, as well as objections from competitors such as Qualcomm, Microsoft and Alphabet’s Google.
Arm’s chip designs are used in smart TVs, cars and almost all smartphones. Competition regulators in the US, the UK, Europe and China began investigating the proposed deal, amid concerns that the deal would hand Nvidia too much market power.
This led to a growing sense among industry watchers that the deal would be blocked, so the decision by Nvidia and Softbank to call it off came as no surprise. Softbank now plans to float Arm in an IPO by March 2023, probably in the US where tech stocks tend to fetch higher valuations, though there are also calls for the UK-born company to list in London.
As investors wonder what plans Nvidia has for reallocating its cash pile, the abandoned Arm deal is likely to remain a key talking point when Nvidia reports its Q4 results on Wednesday 16 February.
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