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Why Nvidia Stock Rocketed Today

What happened

Shares of Nvidia (NASDAQ:NVDA) stock closed down 4.5% on Tuesday after Bloomberg reported that Nvidia’s $40 billion bid to buy Britain’s Arm Holdings is all but dead.

Nvidia may abandon the deal, said Bloomberg, and SoftBank — Arm’s seller — is already contemplating putting Arm up for an initial public offering instead. But with Nvidia stock bouncing back today, and back up 4.7% as of 10:40 a.m. ET, it’s looking like some investors may have decided this is actually good news for Nvidia.

A rocket ship  blasting off from a laptop atop a computer chip.

Image source: Getty Images.

So what

Why might that be?

When Nvidia announced its intention to purchase Arm back in September 2020, the company explained that it would meet 70% of its $40 billion purchase price by paying in shares. As much as $28 billion of the $40 billion, in fact, would be paid in Nvidia stock. 

But on Sept. 13, 2020, when Nvidia announced this deal, Nvidia shares were selling for just $122 per share. Today, those same shares cost 90% more — $232.50. Logically, therefore, the same deal that was valued at $40 billion 16 months ago must now be worth more like $65 billion to Nvidia.

Now what

What does this mean for Nvidia and its shareholders? Well, not to put too fine a point on it, but if this deal doesn’t go through, they will end up saving about $25.2 billion that they never expected to spend on Arm in the first place.

Granted, the news isn’t all good. Nvidia will still be out its $2 billion downpayment on the transaction, and will have to pay a further $1.25 billion “breakup fee” when it walks away from this deal. But even so, $25.2 billion minus $2 billion minus $1.25 billion means Nvidia still saves about $22 billion when its Arm deal collapses.

I’d say that’s good news for Nvidia. And I’d say it’s a pretty decent reason for bidding up the price of Nvidia shares today.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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