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Nvidia's ARM deal 'could be a huge winner for the company': analyst

Yahoo Finance’s Myles Udland, Julie Hyman, and Brian Sozzi break down Nvidia's latest earnings report with Daniel Newman of Futurum Research.

Video Transcript

JULIE HYMAN: Nvidia shares down about 1 and 1/2% today. This is after the giant chip maker came out with earnings that were actually quite strong, if you look at how they were versus estimates. Overall sales up 57%. The company's earnings per share $2.12 and they're forecasting 55% sales growth in the fourth quarter.

What might be the area of disappointment-- the company expects a sequential decline in its data center business sales in the current quarter. Let's bring in Daniel Neuman to talk about this. He is Futurum Research-- with Futurum Research-- analyst.

Daniel, is that a source of disappointments for you? Do you think that's why the shares are down, and did you see anything else in this report that gave you pause?

DANIEL NEWMAN: First of all, it was a very, very strong quarter for the company. It's the second quarter of reporting the Mellonox revenue into the overall number, which obviously showed that huge spike. Over a billion dollars of growth year over year in the data center business. Organically, though, it was 77%. So everyone's looking at that 160% or so growth. But 77% was organic.

And this is really a byproduct of Jensen Huang's vision of the AI space, of addressing the Enterprise and the new Ampere architecture. Companies like AWS investing in this and putting this into their cloud offerings. And of course, Enterprise is investing at scale.

I do think, Julie, to your point, that some of the pressure and the sort of anticlimactic result after such a big earnings beat did come down to people looking for that continued huge sequential growth in the data center business. And given the fact that, basically, the company came out and said, it's not going to happen next quarter. I think a lot of people that wanted to see that continued growth.

If I can say one other thing, since you asked, the Arm deal, I feel like, drove an immediate spike in value. The stock really shot up, almost to the point where it covered the entire $40 billion, in terms of market capitalization, after the announcement. And I think people have really been looking out to what Nvidia can be, and that has driven the price.

And so a true example to where the price is reflective of where people see the company. And so to some extent, maybe it felt like it was maybe a little overbought. And some people sold now and said, hey, it's a good opportunity to take some profit in the company.

But overall, my feeling is the company's in really good shape. It's in a great position. And this Arm deal, assuming it goes through, is going to be very, very good for the company long term.

BRIAN SOZZI: Well, Daniel, what-- take us through that. What's your-- what are you envisioning financially? Let's assume that Arm deal is closed. How does that change the financial makeup of Nvidia over the next three to five years?

DANIEL NEWMAN: Well, so, Nvidia, really, right now, is very focused in that AI space. But there's a couple of new business opportunities that the expansion in Arm offers the company. First of all, is the licensing revenue promise. So Arm essentially licenses its intellectual property and technology to almost all of Nvidia's competitors, which is going to, of course, make this process of completing this deal very interesting.

But all of a sudden, the company is playing in mobile devices. The company is playing in CPUs for notebooks. And these drive extraordinarily profitable revenue. You saw how profitable Qualcomm was in its earnings-- in its most recent earnings result.

And that's a big core to Qualcomm's business, is it's a licensing business. Nvidia doesn't really have that revenue stream. So this is a whole new revenue stream for the company, playing in the entire space, being able to benefit more from 5G, from mobile, from CPU, IoT. Areas that the company really doesn't feel right now.

I wrote a piece on "MarketWatch," Brian, that I basically said the trillion dollar valuation potential lies in getting this Arm deal done. That's how ambitious I am that this deal could be a huge winner for the company.

I also think there's going to be a ton of discussions-- you're going to see a lot of regulatory battles around the world. This is not going to be a slam dunk deal, by any means, for the company. And I think there's a little bit of nerviness in investors there, as the companies hit this really high watermark. The growth has been really fast. This deal getting done is going to be really important.

But the execution has been fantastic. Margin, Brian, has been great. And the results have been really good in its two key areas, which is essentially gaming and data center. And the rest of the business is moving along quite nicely as well.

JULIE HYMAN: So to your point, Daniel, the shares have more than doubled this year. Lot of optimism about that deal. What could go wrong in all of this scenario? Could it be an execution stumble, when it comes to the deal? Or could it be something else?

DANIEL NEWMAN: That's a really big question. But you have to presume that the biggest competitors of Nvidia-- so we look at companies like Intel, you look at companies like Qualcomm, even Apple, who just released their new Arm M1 architecture, are now going to have to go to Nvidia to procure these-- this IP or these chips. And that's going to be a different go-to-market proposition. Arm sort of had this arm's length-- no pun intended-- from the market, where they licensed the intellectual property to any and all.

And so Nvidia is promising that that will not change. And I think that's going to be a big point of discussion throughout the process. I am-- I am bullish that I think the company will be able to get it done. Jensen has shown, through the acquisition of Mellonox, that the company is able to move big deals through regulatory bodies. You know, you're going to look at regulatory here in the US, Julie, but you're also going to have to look at regulatory bodies like the CFTC, KFTC, and across-- and also Europe, which is always very, very willing to look at anti-competitive or any sort of competition issues to slow down deals.

I believe the company gave themselves a nice time horizon to get this deal done. But that is I think the linchpin to this next massive wave of growth of the stock, is going to be people feeling confident that this Arm deal is going to get done.