Is NVIDIA (NVDA) Prepping for an Acquisition?

September 9, 2016 7:10 AM EDT
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Price: $103.43 --0%

Rating Summary:
    24 Buy, 17 Hold, 2 Sell

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Despite having cash of more than $5 billion and annual FCF of $2 billion, red-hot NVIDIA (NASDAQ: NVDA) filed a mixed shelf for an indeterminate amount this week. While markets largely ignored the filing, Nomura Securities analyst Romit Shah discussed the potential for M&A as growth slows from breakneck speeds.

Shah said while investors don’t see M&A as part of Nvidia's DNA, they believe that CEO JenHsun Huang has considered transformative acquisitions in the past. With revenue growth decelerating from the sharp 29% growth in the current quarter, the analyst notes that there are multiple examples in recent years of companies adding to scale amid slower growth: Broadcom (NetLogic), Avago (Broadcom), NXP Semiconductor (Freescale) and Lam Research (KLA-Tencor).

He sees Nvidia only pursing businesses that are a good strategic fit; thus, improving the company’s presence in non-gaming markets such as datacenter, artificial intelligence and automotive.

While investors have asked the firm if Xilinx (NASDAQ: XLNX) and Cavium (NASDAQ: CAVM) could be candidates, neither is likely in the firm's view. "Xilinx would provide TAM expansion into markets such comm infrastructure and networking, as well as access to distribution. However, FPGAs would create an overlapping product offering in the datacenter," he notes. "Cavium the other hand could boost Nvidia’s product offering in servers, but Cavium has not given any indication of interest."

Shah said Nvidia could pursue a software company, an area the company is gaining expertise and a contributor in recent periods to highe gross margin and platform revenue. That said, the analyst sees investments in software being smaller in scale (i.e. private).

Lastly, the analyst highlighted IBM's (NYSE: IBM) microprocessor business (POWER family), which stands out to them as an attract business into which Nvidia would probably like to expand because it would help create an end-to-end silicon platform that includes a CPU and GPU. Shah said it is their understanding that is that Power is not considered a core franchise within IBM. In addition, this business has scale. Gartner estimates Power-related revenue of abo $3 billion per year. Furthermore, Nvidia and IBM already have a strong partnership.

Overall, the analyst remains positive on Nvidia and reiterated a Buy rating and price target of $62.50. They believe the prospects for an acquisition that boosts the company’s presence outside of gaming could accelerate growth longer-term.

For an analyst ratings summary and ratings history on NVIDIA click here. For more ratings news on NVIDIA click here.

Shares of NVIDIA closed at $62.64 yesterday.

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