Nvidia could pay Intel 50% more

According to a report from the Wall Street Journal, mobile chipset specialist Qualcomm has approached Intel about a possible acquisition. But NVIDIA, with the ability to pay up to 50% more than Intel, would be a much better acquisition target. Why? NVIDIA is worth nearly $3 trillion. Intel is worth about $95 billion, Qualcomm is worth about $190 billion. NVIDIA has nearly $35 billion in cash, while Qualcomm has less than $10 billion. Intel’s 50+ years of chip design, manufacturing excellence and CPU market share are much more valuable in NVIDIA’s hands. Simply put, NVIDIA could easily sprinkle and infuse Intel’s products with its magic and momentum to take back share from AMD in the server and PC markets. Think of it this way: An NVIDIA AI-powered chip for your PC. This becomes compelling considering that NVIDIA is already a supplier of GPUs for PCs and accelerated computing chips for servers. There are significant regulatory hurdles for Nvidia to overcome before it can make this happen, and so far no actual deal talks with Nvidia have been announced, but we think bankers see a big opportunity. Here are our thoughts and numbers.

Intel is an attractive acquisition target right now

The company’s shares have fallen more than 55% this year and nearly 70% from its 2021 high due to market share losses and multiple manufacturing-related missteps. Nevertheless, Intel is showing signs of recovery. Its foundry business has won big-name customers, including Amazon’s AWS, and upcoming PC, data center CPU, and accelerated computing processors are also promising. Intel is getting serious about cutting costs, aiming to cut up to $10 billion by next year.

Now, INTC stock’s decline over the past three years is far from a sign of much more volatile annual returns than the S&P 500. The stock returned 6% in 2021, -47% in 2022, and 95% in 2023. In contrast, the Trefis High Quality Portfolio, a collection of 30 stocks, has been much less volatile. It has also outperformed the S&P 500 every year over the same period. Why is that? As a group, the stocks in the HQ Portfolio have offered better returns with less risk compared to the benchmark index. Because it has less rollercoaster-like movements, as evidenced in the HQ Portfolio’s performance metrics.

Qualcomm deal will provide little benefit to Intel shareholders

Qualcomm may be interested in expanding its chip lineup and gaining a foothold in the server and PC markets, but it lacks the resources to drive Intel’s transformation. In contrast, we believe NVIDIA is better positioned to leverage Intel’s assets. NVIDIA has much more capital and resources to invest in Intel’s turnaround efforts and growth. In addition to a stronger balance sheet, NVIDIA already has a large presence in the key markets where Intel competes, serving as a major supplier of GPUs for PCs and accelerated computing chips for servers, two areas where Intel’s CPU business is also deeply rooted. This could allow NVIDIA to sell a wider range of products to existing customers. Given that Intel is also moving into the GPU space with its Gaudi 3 chips, NVIDIA could eliminate a competitor through the deal. NVIDIA has emerged as the face of the AI ​​hardware revolution, but the data center company is growing sales at an even faster pace than NVIDIA and is trading at a cheaper valuation.

Intel’s foundries would be valuable to NVIDIA

Nvidia currently relies heavily on third-party foundries such as TSMC to manufacture its silicon. Indeed, Intel has lagged TSMC in terms of technology in recent years. However, it has made considerable progress recently. Intel’s latest manufacturing technology, 18A, will deliver a sub-2-nanometer process node and is expected to begin mass production by the end of 2024. That’s about a year earlier than TSMC’s planned 2-nanometer process, N2P. Given its cutting-edge GPU designs, this could benefit Nvidia in the future. Aside from reducing manufacturing costs, a deal with Intel could also ensure supply chain stability. Why? TSMC, which is responsible for almost all of Nvidia’s high-end GPU manufacturing, is based in Taiwan, making it vulnerable to geopolitical tensions with China. Intel, with its manufacturing base in the United States, would greatly reduce that risk. Sure, Nvidia could use Intel’s foundry services without acquiring the company, but at current valuations, an outright acquisition may make more sense.

Breaking down the numbers

Intel is losing share in both the PC and server markets to rival AMD. Intel’s revenues have fallen from about $72 billion in 2019, before the COVID-19 pandemic, to about $54 billion as of last year. That’s a decline of about $18 billion, with declines of about $8 billion each expected in both client computing and data center segments. Assuming that Intel’s client and data center revenues will increase by about $6 billion each over the next three years due to NVIDIA’s AI technology expertise and momentum, revenues would increase by about $12 billion. Assuming an operating margin of about 30%, operating income would increase by about $3.6 billion. Additionally, there will certainly be some savings as NVIDIA will eventually leverage Intel’s manufacturing capabilities. Assuming that manufacturing and other cost savings will increase the combined company’s operating income by an additional $4 billion (about 5% of Nvidia’s expected operating income this year), that would total about $7.5 billion in additional income. Assuming an EBIT multiple of about 15x (roughly half Nvidia’s), that adds $112 billion in value. If Nvidia decides to distribute 40% of that to Intel shareholders, it could easily bid about $45 billion more, a premium of almost 50% to Intel’s current market price.

Overall, I think NVIDIA is the better candidate, but I can’t guarantee that Intel and its shareholders will want to buy them at this point. With a lot of new developments underway, Intel’s stock price could rise substantially. If the company executes well on its foundry plans and delivers compelling new CPU and GPU chips, Intel could see a nearly 3x increase. On the other hand, if it fails to execute, Intel’s stock price could fall to as low as $10.

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