Nvidia’s growing cash hoard points to M&A

Coherent

19/11/2024 13:00

(The author is a Reuters Breakingviews columnist.  The opinions
expressed are his own.)
    By Robert Cyran
       NEW YORK, Nov 18 (Reuters Breakingviews) - Nvidia
 NVDA.O  is making so much money that founder Jensen Huang
doesn’t know what to do with it all. The $3.6 trillion chip
designer is spending more on dividends and buybacks, but its
cash pile is still growing, doubling over the past year to $35
billion amid a frenzy for the company’s artificial-intelligence
chip designs. Combined with Huang’s prodigious ambition and a
more lenient antitrust stance under President-elect Donald
Trump, M&A may be back on the menu.
    Nvidia has grown from a startup to the most valuable company
on earth in the three decades since its founding. Huang’s 3.8%
stake is worth more than the entire market value of fading $107
billion giant Intel  INTC.O . Nvidia’s big insight was to see
how the industry could keep increasing computing power even as
traditional processor speeds topped out in the early 2000s. It
does this by providing chips and software that break the work
into pieces so it can be done simultaneously, known as parallel
computing. The hardware that the company designs is so in-demand
that specialist manufacturers like Taiwan Semiconductor
Manufacturing  2330.TW  have little incentive to spend time
supplying possible Nvidia rivals. Huang’s kit and the associated
software have become standard among AI developers and in
superfast data centers, which act as giant hubs of computing
power for large language models like OpenAI’s ChatGPT.
    As a result, Huang is coining it. Nvidia’s cash has
quintupled since 2020 thanks to an eight-fold revenue boost. It
will probably keep piling up. Free cash flow, or how much the
company’s operations throw off after subtracting capital
expenditures, will be $200 billion or more over the next two
years, Bank of America analysts expect. Two years of dividends
and share buybacks at their current rate would consume about $60
billion of that sum, meaning that in net terms the company’s pot
of money would swell by about $140 billion. Add that to the
existing pile of money, and Huang would start 2027 with about
$175 billion of idle liquidity, which is more even than current
cash king Apple  AAPL.O . Along with the company’s richly valued
shares, that affords ample M&A firepower.
    
    
    Nvidia last attempted a big deal in 2020, when it agreed to
pay $40 billion in cash and stock for chip architecture
specialist Arm  ARM.O . Huang wanted to use the UK company’s
basic semiconductor designs to help make data centers more power
efficient. That deal failed after two years of scrutiny by
governments and competition watchdogs in the United States,
China and Britain. Nvidia could probably expect an easier ride
under a more laissez-faire and nationalist Trump administration,
particularly if it presented any deal as strengthening a U.S. AI
champion. But buying another chipmaker is probably still
verboten. For example, Huang might in theory like to snap up $78
billion Marvell Technology  MRVL.O  for its data-center
networking technology and ability to design custom chips for AI
developers. The semiconductor sector is global, though, and
China and Europe would probably object again if Nvidia tries to
buy players with scarce technology, like Marvell or Arm.
    Other areas are probably open. Nvidia’s last successful
acquisition, the purchase of Mellanox Technologies for $6.9
billion in 2019, provides some clues about Huang’s possible
thinking. He bought the networking firm because he could see
that computing was moving from working in parallel on a single
processor to splitting the work even more widely among different
chips. All these different bits of kit must talk to each other,
and Mellanox provides the gear that facilitates those
interactions. The trend is increasing given the massive workload
of training and using AI models. To use a stylized example, a
group of 100 servers all talking to each other will have almost
5,000 distinct connections between the different points, while a
group of 1,000 would have nearly 500,000. This puts a greater
emphasis on sending signals around the network extremely
quickly, which is why Nvidia could in theory buy an optical
networking firm like $16 billion Coherent  COHR.N , whose
technology can connect data-center servers together at lightning
speeds.
    Huang, who has displayed an uncanny ability to foresee major
technological shifts, could also go in more unusual directions.
As Nvidia’s chips improve, the cost of doing computational work
on them has halved roughly every two and a half years. That
trend will probably remain on track for some time, making the
hardware cheaper and more ubiquitous, and allowing more AI chips
to show up outside the data center. That’s why Huang has
repeatedly talked about new markets like robotics, autonomous
driving and drug development. The company’s growing venture
capital operation, which owns $1.8 billion of equity in smaller
firms compared with essentially nothing a few years ago,
provides a possible glimpse into the future. Huang has built up
stakes in analytics company Databricks, which is mulling an
initial public offering, robotics companies Serve Robotics and
Figure, and drug discovery firm Charm Therapeutics.
    
    
    Of course, analysts’ rosy forecasts for Nvidia could turn
out to be too optimistic. AI has advanced rapidly in the past
few years, in large part because the major companies have thrown
more data and computing power at the problem. One risk for
Nvidia is that this method of improvement may be offering
diminishing returns, some researchers are increasingly warning,
which would lead to slower growth and less demand for AI-ready
chips. Another danger is that tech giants like Microsoft
 MSFT.O  and Amazon.com  AMZN.O  could redirect spending towards
specialized in-house designs as part of an attempt to ease
Huang’s grip on the industry. If any of those risks materialize,
Nvidia’s cash hoard might grow more slowly than current
estimates suggest.
    On the other hand, a less sunny outlook may even add impetus
to any M&A hunt for Huang, who has a track record of turning the
business on a dime. Even Nvidia’s current cash pile exceeds the
market value of almost half of the companies in the S&P 500
Index  .SPX . It would be a surprise if Huang simply sat on it.
    
    Follow @rob_cyran on X

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Nvidia's cash hoard is piling up    https://reut.rs/3O6iNbB
Nvidia's stock  is a valuable acquisition currency    https://reut.rs/4frbvLs
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 (Editing by Liam Proud and Pranav Kiran)
 ((For previous columns by the author, Reuters customers can
click on  CYRAN/ 
robert.cyran@thomsonreuters.com))