CNBC Investing Club: Our Nvidia stake was never based on buying Arm from Softbank

Published Tue, Feb 8 20222:05 PM EST

Kevin Stankiewicz @in/kevin-stankiewicz-b5593466 @kevin_stank

Nvidia will have to do without the major global smartphone presence its failed blockbuster acquisition of U.K. chip designer Arm would have provided. But exposure to smartphones is not why the Investing Club likes Nvidia. The deal was abandoned because of "significant regulatory challenges," Nvidia and SoftBank, which owns Arm, said in a Securities and Exchange Commission filing Tuesday. Bottom line "It doesn't really change our outlook. It was always a low-probability deal," said Zev Fima, portfolio analyst for the Investing Club, which owns 760 shares of Nvidia, with a 1 rating on the stock . Nvidia has the third-largest weighting in the Charitable Trust at around 4.7%. Jim Cramer of the Investing Club and "Mad Money" likes the stock so much that he named his dog Nvidia and said in December he sees the company as a $10 trillion stock one day . Currently, Nvidia's market value is around $620 billion. "At the end of the day, Nvidia is still exposed to some of the most exciting secular-growth end markets on the planet," such as artificial intelligence, gaming and data centers, said Fima. "It all leads back to the data center, obviously. None of this other stuff, the cloud, none of it works without the Nvidia chips, and that's really what the investment thesis is about," he added. By the numbers, data center revenue grew 55% year-over-year in the third quarter, resulting in a record $2.94 billion in sales. Gaming is currently Nvidia's biggest market, accounting for a record $3.22 billion in revenue in the third quarter, up 42% year-over-year. Recurring revenue also is on the rise for Nvidia and further adoption of the metaverse — or the omniverse, which is Nvidia's preferred term — represents an additional area of opportunity. Another reason the Club believes in Nvidia is its plans to make its own data center CPU. Nvidia announced its server chip plans in April , stepping into a market traditionally dominated by Intel . Nvidia's "Grace" server processor is actually going to use an instruction set from Arm. Despite the failed deal, Nvidia will maintain its 20-year Arm technology license. It will take a $1.36 billion charge in its current first quarter of fiscal 2023. Deal background Nvidia announced its intentions to buy Arm in a stock-and-cash deal in September 2020 , carrying a price tag at the time of $40 billion. However, it faced significant antitrust scrutiny from regulators basically from the get-go. In December, the U.S. Federal Trade Commission sued to stop the deal . California-based Nvidia is the world's largest maker of graphics and AI chips. Arm, which is based in the U.K., supplies crucial chip architecture to other semiconductor companies that ultimately ends up in most smartphones around the globe, including Apple 's iPhone. "It would've been great" if Nvidia could have bought Arm, Fima acknowledged. "But our thesis was never predicated on an Arm acquisition, so we're in it regardless. We still find it attractive." Club holding Cramer's Charitable Trust first bought Nvidia shares in May 2019, picking up 100 at roughly $36.74 apiece, more than a year before the now-failed Arm deal was announced. The Club's most recent Nvidia purchase came in March 2021, buying 60 shares at roughly $124.69 apiece. The Club is maintaining its $345 price target on Nvidia shares. The stock traded around $248 Tuesday. Shares had put together an impressive multi-year, punctuated by last year's 125% advance. However, the stock has struggled so far in 2022, down nearly 16% year to date, as investors have generally looked to more defensive parts of the market. Nvidia hit an all-time high of $346.47 per share back in November. What's next? Nvidia is set to report fourth-quarter results next week on Feb. 16 after the closing bell. It also has an investor day scheduled for March 22. The Club is keeping an eye on what Nvidia does with the roughly $12 billion in cash that was earmarked for the Arm acquisition. "We definitely want to see them either buy back shares, which are at a significant discount to all-time highs at this point, or just use it opportunistically even if that could be M & A [or] accelerated R & D," Fima said, adding he expects management to discuss next steps on the upcoming earnings call. (Jim Cramer's Charitable Trust is long NVDA and APPL. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. 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Jen-Hsun Huang, chief executive officer and co-founder of Nvidia, speaks at an International Consumer Electronics Show in Las Vegas.

Jacob Kepler | Bloomberg | Getty Images

Nvidia will have to do without the major global smartphone presence its failed blockbuster acquisition of U.K. chip designer Arm would have provided.

But exposure to smartphones is not why the Investing Club likes Nvidia.