Nvidia stock 'has been almost bulletproof' before Monday dip, strategist explains

Futurum Research Principal Analyst Daniel Newman joins Yahoo Finance Live to discuss Nvidia's stock movement and other aspects of the company's trajectory.

Video transcript

AKIKO FUJITA: We are seeing shares of NVIDIA under pressure yet again, that stock down more than 4%. The very latest here today, EU antitrust regulators halting their investigation into NVIDIA's acquisition of UK chip maker ARM, saying they need more information. That came after the deal hit a big hurdle here in the US last week, with the FTC suing to block the $40 billion deal.

Let's bring in Daniel Newman. He is Futurum Research principal analyst. Daniel, let's just put it out there bluntly. I mean, this is something that certainly a lot of analysts, including yourself, have been speculating that this is a deal that may not go through. I mean, are the hurdles just too significant right now?

DANIEL NEWMAN: It's really starting to look that way. For the first time, you're starting to see various analysts, equities, industry, all sort of coming to a consensus that the odds of this deal going through are at a fairly low percentage. You're hearing everything from all but dead, to less than 5% was a number that came out today.

I'm not quite as bearish. I do believe that Jensen Huang and the team got into this deal, believing it would be achievable. But every one of these hurdles and now the FTC is a massive one. So it's hard to-- a week ago, I was saying it's more of a coin flip that was slightly looking to the negative. And now you're looking at, you know, if you're saying more than maybe a 20% odds on, you really aren't looking at the situation and all of the various regulatory bodies that are scrutinizing this deal right now.

AKIKO FUJITA: You think the move is a bit overdone if we're talking about the stock price? I mean, we were talking to analysts several weeks ago who said that the possibility of this deal not going through has already been priced in. And yet here we are, talking about a move of more than 4% to the downside.

DANIEL NEWMAN: Yeah, it's a great question. I've watched sort of the gyrations in the market. And NVIDIA's been almost bulletproof over the past few weeks and months. I mean, when the UK second level probe came out, I thought, wow, the market, if they're going to react, probably will react to this one, as it was a pretty big, you know, kink in the armor. And the market didn't. It kept going up. So I think this is the indicator for the first time.

Now you've got to remember, the deal was $40 billion, but at this current price for NVIDIA stock, I believe the deal rose to more like $75 billion. So a little bit of a pullback in the name of this deal more likely not going through. And going through, it probably is warranted, despite some analysts maybe suggesting that it had already been priced in.

AKIKO FUJITA: Yeah, you talk about NVIDIA's stock being bulletproof. I mean, the most recent quarter, they posted record revenue. This is before any of this deal has been finalized. So is there an argument to be made here that this may not be as significant a head wind for the company if, in fact, the deal doesn't go through? Or do you think it could pose significant challenges in terms of their long-term strategy?

DANIEL NEWMAN: I think it was more of a synergy for NVIDIA that had a whole bunch of question marks for the broader ecosystem. Look, NVIDIA, it's not just been this last quarter. It's been, I think, something like nine or 10 quarters of record revenue back to back to back. Huge growth, huge profitability. We've all seen the company's market cap raise to over $700 billion. And I'd penned, if this deal went through-- I said this over a year ago-- this will take its market cap over a trillion. This will be the next trillion dollar market cap company.

Having said, that their growth has not depended on ARM any more than any other ARM licensee. And, you know, the issue I have, by the way, and some of my comments about this isn't so much to say that NVIDIA should get this deal or should go through. It's more that how much is the change in the regulatory environment under Lina Khan here in the US deciding to regulate speculatively. And we were hearing this with things with Amazon. We're hearing this with other regulatory enforcement, the laws and the changes they're trying to make, versus the need to enforce the laws based upon allowing regulatory approval of a deal like this.

And you can go back to look at Facebook and WhatsApp or Instagram and lots of deals where, now, we're looking back at them and saying, should we have let that happen? But are we playing that minority report game? Or is it the regulatory responsibility enforcement to make the decision on whether a deal would be anti-competitive? Or is it up to the company to follow their plan and not breach laws? And if they are, enforcement needs to be in place.

AKIKO FUJITA: Yeah, but in this particular deal, the pushback isn't just from the US side. I mean, the EU competition watchdog has said that they're worried this deal could push up prices, reduce choices for consumers. I mean, they have raised the same concerns.

DANIEL NEWMAN: Yeah, absolutely. First of all, the EU is always on top of regulatory. We see the EU uses enforcement much more aggressively than here in the US. I've spoken to that many times. You'll see much larger fines and more frequent fines across almost all of the FAANG or MAMA stocks have seen enforcement from the EU. The FTC, though, has changed its posture. You've seen several new bills coming through from Congress that want to change antitrust and enforcement and the regulation of big tech. And are we seeing sort of this being done preemptively before the laws are changed? And that's kind of the question here.

And then the other question is, when you talk about stifling competition, I think how much more will this stifle competition versus, say, the x86 ecosystem that exists? The thing about ARM that's interesting is the companies right now, they are building on our most successful-- you have Apple, you have Amazon and AWS, you have Qualcomm. You know, I know Microsoft is building in that direction. These are all very large tech companies utilizing ARM.

Whether that's an Nvidia-owned ARM or an independent ARM, those companies would still likely be building on ARM. And then the question is how much would NVIDIA have power over pricing? How could they manipulate that pricing? How could weaken their competition and stifle competition by having that? But then, again, there is still the x86 ecosystem. So that is a competitor. So they would want to keep it competitive for their own benefit. So there's a lot of pros and cons. I just think there's nuance. And that's what I'm kind of interested is how we've come to such a rapid conclusion and not looking more at the nuance.

AKIKO FUJITA: And finally, Daniel, it feels like it's been a while since we've talked about some of the supply chain backlog, especially with the chip makers. We've started to hear from a lot of the big names that, at least in some areas, those snags have started to ease. What are you seeing in the chip space? Are we still kind of in that shortage that we're talking-- we've been talking about for several months? Are we starting to see some signs of light at the end of the tunnel?

DANIEL NEWMAN: There seems to be some signs, and we saw that in the most recent quarter's earnings. We saw AMD, Qualcomm, and NVIDIA all do tremendously well. We saw Dell, I believe, they had a blowout quarter on their PC numbers. But it seems to be a bit of have and have nots of those that really manage their supply chain and demand planning well. The companies that got out in front of it-- and a lot of them are in the semiconductor space, you know, the high tech, the leading edge space-- have seemed to do very well, have been able to fulfill a lot of that demand, even with raising demand.

Remember, we're still shipping more units than ever before. The automakers, for instance, were a bit of an outlier because when the pandemic was onset-- and we've heard this story a bunch of times-- but all of them really thought that that demand would fall off so sharply. And they lost their supply, and it was taken over by other things like PC, like cloud and data center. And those companies have been able to take advantage of it. I think it's easing, but it's easing slowly.

I think the idea that we're past this isn't necessarily true, but again, two things had to happen-- supply had to grow. And so we still need those fabs here in the US. We still need to have more resiliency. But concurrently, we also need to see demand slow down a little bit. And with the economic gyrations we're seeing, maybe that is slowing just a little bit.

We've seen some slower guidance from some companies, some cloud companies in the past few months, which has sent some of the tech stocks stumbling a bit. So maybe that slightly slower demand coupled with increasing supply and planning has started to level out. But I still think we're a year away from really seeing that demand met.

AKIKO FUJITA: Daniel Newman, always good to have you on, Futurum Research principal analyst.