Intel's acquisition of Mobileye could drive NVIDIA stock valuations higher. Here's why.
Shares of NVIDIA Corporation (NASDAQ:NVDA) moved higher yesterday, following the announcement that Intel (NASDAQ:INTC) would buy self driving technology company Mobileye (NYSE:MBLY). While the move didn't seem to go down very well with Intel shareholders, who sent the stock lower by over 2%, it seems to have lifted the sentiment around NVIDIA stock. Shares of NVIDIA were up 2.75% following the development, driven by Intel's move to buy Mobileye for significantly higher valuations than those commanded by NVIDIA. While the two companies don't make for an apple's to apple's comparison, they do compete in spaces like the advanced driver assistance systems (ADAS) market. And Intel's Mobileye buyout might just be the trigger that NVIDIA needed to resume its upward trend from last year.
Investors And Some Analysts Didn't Quite Like The Intel Mobileye Deal.
Intel shares fell by over 2% yesterday after news of the deal came to light. And investors were not the only ones who weren't very impressed. While some observers might have been put off by the 34% premium Intel was paying to buy the self driving technology company at $15.3 billion, others have different concerns. Natalia Wojcik of CNBC noted why Jefferies downgraded Intel following this latest development. quoting from the post:
A flurry of dealmaking by Intel is masking slowing growth for its data center unit, which is facing stiff competition from Nvidia, said Jefferies, which downgraded the chipmaker to hold from buy. "INTC's use of cash for M&A makes us wonder if the market is drifting away from x86," said Jefferies analyst Mark Lipacis on Monday in a note titled "Chasing New Markets."
To be fair, Mobileye is one of the bigger players in the self driving technology market, which makes the acquisition price debatable, to say the least. A ~30% premium isn't unheard of for tech companies. What's more, Mobileye operates in a market that is growing rapidly and is expected to be one of the next growth frontiers for the tech sector as a whole. It's quite easy to see how the company stands to benefit by gaining access to Intel's deep pockets, while the deal helps Intel secure a presence in this market, where several smaller players have taken the early lead. But not all of this is necessarily bad for NVIDIA.
Why NVIDIA Stands To Gain From The Intel Mobileye Deal.
NVIDIA has established itself as one of the key players in the self driving cars market. And it's worth noting that at least some of NVIDIA's gains have also come at Mobileye's expense. Last year, Tesla Inc (NASDAQ:TSLA) switched from Mobileye's technology to NVIDIA's Drive PX2 platform after the driver of a Model S was killed last year while using Tesla's autopilot feature. While the cause of the crash has been disputed by Mobileye, the result remains the same - Mobileye has conceded some business to NVIDIA. And as Paul R La Monica points out in this post on CNN Money, at least some industry observers believe that NVIDIA has the egde:
"Hans Mosesmann, a chip analyst with Rosenblatt Securities, said in a report Monday that he's recommending Nvidia and not Intel. He argues that Nvidia will be Intel's biggest rival and that its technology gives it an advantage over Intel and Mobileye."
Jay Somaney a contributor on Forbes also brings up another important point - the Intel Mobileye deal should only help NVIDIA's valuation. Quoting Somaney:
"Nvidia currently has a market capitalization of $58 billion, which gives us a revenue multiple of 6.4x, a fraction of what Intel just paid for Mobileye. Think about it for a bit. Shares of Nvidia are very cheap and I remain a buyer."
What's more, NVIDIA isn't just about self driving tech. The company has multiple drivers that range from its more conventional stronghold - gaming, to artificial intelligence and data centers. And Teresa Rivas of Barron's aptly highlights this in a recent post:
"In a sense, the premium that Intel is paying for Mobileye reinforces the value of the growing market opportunity and Nvidia’s business. Nor are self-driving cars Nvidia’s only source of growth. The company’s gaming business has been growing quickly in recent quarters, and although that’s expected to slow near-term, it should benefit from virtual/augmented reality (VR/AR) and a good upgrade cycle. Nvidia’s video game expertise has also allowed it to create chips that are critical in making robots cheaper to install and more versatile in use. Nvidia has its own deep-pocketed partner as well. Just last week, it and Microsoft(MSFT) announced a new hyperscale design for cloud-based artificial intelligence computing."
Clearly, NVIDIA stands to gain on multiple counts from the recent developments, one of which is also the company's unveiling of its fastest GPU ever, the GTX 1080 Ti. NVIDIA's move to price the graphics card aggressively when compared to its Titan X, which was its fastest GPU until the 1080 Ti, should also help the company compete more effectively with arch rival AMD (NASDAQ:AMD). NVIDIA may or may not be able to replicate its stellar performance in 2016, but one thing is quite evident - NVIDIA is a good investment option for long term investors.
Surprising as it may be, NVIDIA isn't one of our top stock picks, which have beaten the NASDAQ by over 134%. If you're interested, there's also our list of favorites from the auto sector, which have beaten the S&P 500 by close to 160%.