It may come as a surprise that Nvidia (NASDAQ:NVDA) stock has more room to run after the historic rally it just had.
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The chipmaker is in advanced talks with SoftBank (OTCPK:SFTBY) to acquire ARM Holdings (OTC:ARMHF) , a software design company. The move will prove instrumental in morphing Nvidia into a software company, rather than a simple chipmaker. In my last piece on Nvidia, I noted that its acquisition of Mellanox has reduced Nvidia’s reliance on its gaming division. So Nvidia has adopted a concerted strategy to widen its focus.
Meanwhile, the company’s second-quarter results beat analysts’ average estimates once again, with every division firing on all cylinders. Every one of the company’s main businesses grew at healthy rates, as its revenue smashed the average estimate, coming in at $3.87 billion.
In short, NVDA stock is a fantastic performer in the tech space. And Nvidia does not have a sense of complacency. The semiconductor firm has many strengths and is putting industry bigwigs like Intel (NASDAQ:INTC) and Advanced Micro Devices (NASDAQ:AMD) on notice.
What Does the ARM Deal Mean for NVDA Stock?
If Nvidia buys ARM Holdings, it will enter the smartphone and tablet markets. The deal will be a game changer if it goes through. ARM is a supplier to several big names, including Amazon (NASDAQ:AMZN), and Apple (NASDAQ:AAPL) has already announced that its next set of Macs will use custom made ARM-based chips.
Apple’s decision to replace Intel’s x86 architecture with ARM is momentous. If the transition is successful, and there is no reason to doubt that it will be, Intel will likely lose lose a lot of market share to Nvidia.
Acquiring ARM would be a good move for Nvidia. As I mentioned earlier, Nvidia is doing a great job of diversifying its operations. It previously tried to enter the smartphone market through its Tegra chips, but that plan did not work out as hoped. By buying ARM, Nvidia will be able to break into smartphones.
Nvidia’s Other Units Are Doing Very Well
Amidst the commotion of its potential acquisition of ARM, many have forgotten that Nvidia is a mature business that has a strong presence across several sectors. AI, autonomous vehicles, and data centers are among the other businesses in which the company is engaged.
Nvidia has a lot of free cash flow to play with, and it’s using it effectively to increase its exposure to markets that it previously did not have access to.
In my opinion, it has a more aggressive approach than Intel, which is using its excess cash for share buybacks. I am not against share buybacks, since they are an effective method of returning capital to investors. But I struggle to understand why Intel would not want to build more infrastructure or invest in new businesses.
Nvidia’s expansion led Bank of America analysts headed by Vivek Arya to lift their price target on NVDA stock to $600 from $520. Becoming the first $500 billion semiconductor company is a crown that Nvidia will covet. However, its bigger prize is having a prime position in some of the fastest-growing markets right now.
The Bottom Line
NVDA stock is not cheap by any means; the shares have a trailing price-earnings ratio of 94. But that doesn’t mean they can’t climb further. If the Nvidia-ARM deal goes ahead as planned, leading to increased cooperation between the company and Softbank, the sky’s the limit for Nvidia.
Meanwhile, Nvidia’s other business segments are doing very well. The company dominates fast-growing areas in the tech space and is steadily increasing its exposure to new segments.
Nvidia’s CEO, Jensen Huang, has a clear vision of where to take Nvidia. He also has skin in the game through a stake in the company, and that’s always positive.
NVDA stock has been an excellent investment and should continue to reward the owners of its shares for the foreseeable future.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. He has several years of experience in analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio. At this writing, Faizan Farooque does not directly own any of the securities mentioned above.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.