Nvidia Can Outbid Qualcomm To Acquire Intel At 50% Premium

Mobile chipset specialist Qualcomm (NASDAQ:QCOM) approached Intel (NASDAQ:INTC) regarding a potential takeover, per a report in The Wall Street Journal. However, Nvidia (NASDAQ:NVDA) would be a far better suitor, with the ability to pay up to 50% more for Intel. Why? Nvidia is worth close to $3 trillion. Intel is valued at about $95 billion, and Qualcomm is worth about $190 billion. Nvidia has close to $35 billion in cash, and Qualcomm has less than $10 billion. Intel’s 50+ years of chip design, manufacturing excellence, and CPU market share are worth way more in Nvidia’s hands. Simply put, Nvidia can easily sprinkle and infuse Intel’s products with its magic and momentum to take share back from AMD in the servers and PC markets. Think of it this way – Nvidia’s AI-powered chips for your PC. This becomes compelling when you consider Nvidia is already a supplier of GPUs for PCs and accelerated computing chips for servers. Although there would be significant regulatory hurdles for Nvidia to make this happen and there have been no real announced deal talks with Nvidia so far, we believe bankers might see a big opportunity. We describe our thinking and numbers below.

Intel makes for an attractive acquisition target at this juncture

The stock has fallen over 55% this year and by nearly 70% from its 2021 highs, amid market share losses and multiple manufacturing-related missteps. Despite this, Intel is showing signs of a recovery – its foundry business has notched up high-profile customers including Amazon’s AWS while its upcoming PC, data center CPUs, and accelerated computing processors look promising. Intel is getting serious about its cost cuts – aiming to slash costs by as much as $10 billion by next year.

Now the decrease in INTC stock over the last 3-year period has been far from consistent with annual returns being considerably more volatile than the S&P 500. Returns for the stock were 6% in 2021, -47% in 2022, and 95% in 2023. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, is considerably less volatile. And it has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics.

Little upside for Intel shareholders from a Qualcomm deal

Qualcomm may be interested in expanding its chip range and gaining a foothold in the server and PC markets, but it lacks the resources to drive Intel’s transformation. In contrast, we believe that Nvidia is potentially better positioned to leverage Intel’s assets. Nvidia has much deeper pockets and more resources to invest in Intel’s turnaround efforts and growth. Besides the stronger balance sheet, Nvidia already holds a significant presence in key markets where Intel competes, serving as a leading supplier of GPUs for PCs and accelerated computing chips for servers – two areas where Intel’s CPU business is also deeply entrenched. This could enable Nvidia to sell a broader range of products to existing customers. Given that Intel has also been pushing into the GPU space with its Gaudi 3 chips, Nvidia could potentially eliminate a competitor as well via a deal. While Nvidia has emerged as the face of the AI hardware revolution, this data center company has been growing its sales even faster than Nvidia and trades at a cheaper valuation.

Intel’s foundries would be valuable to Nvidia

Nvidia currently relies heavily on third-party foundries such as TSMC to produce its silicon. Admittedly, Intel has lagged behind TSMC in recent years in terms of technology. However, it has made considerable progress lately. Intel’s latest manufacturing technology, called 18A, delivers a sub-2-nanometer process node with volume production expected by the end of 2024 – roughly a year ahead of TSMC’s anticipated 2-nanometer process, N2P. This could potentially benefit Nvidia down the line, given its cutting-edge GPU designs. Beyond possibly lowering production costs, a deal with Intel could also secure supply chain stability. Why? TSMC, which handles nearly all of Nvidia’s high-end GPU fabrication, is based in Taiwan, making production vulnerable to geopolitical tensions with China. Intel, with its U.S.-based manufacturing, would mitigate that risk to a large extent. Granted, Nvidia could utilize Intel’s foundry services without buying the company, but at current valuations, an outright acquisition might make more sense.

Breaking down the numbers

Intel has been losing share in both the PC and server markets to rival AMD. Intel’s revenue has declined from about $72 billion in 2019 – before the Covid-19 surge – to levels of about $54 billion as of last year – a decline of about $18 billion, with both the client computing and data center segments seeing declines of about $8 billion each. If we assume that Nvidia’s AI technology expertise and momentum help Intel boost its client and data center revenues by about $6 billion each over the next three years this would add up to incremental revenue of about $12 billion. If we assume operating margins of about 30%, that would translate into incremental operating profits of about $3.6 billion. Additionally, there are bound to be some savings for Nvidia, as it eventually leverages Intel’s fabrication capabilities. If we assume another $4 billion boost in operating profits for the combined entity via manufacturing and other cost savings (about 5% of Nvidia’s projected operating income for this year) this would translate into a total of about $7.5 billion in additional profit. If we assume an EBIT multiple of about 15x – roughly half of Nvidia’s multiple – that’s an additional $112 billion in value. If Nvidia decides to share say 40% of that with Intel shareholders it can easily bid about $45 billion more – a premium of almost 50% to Intel’s current market price.

Overall, while we think Nvidia would be a better suitor, there’s no guarantee that Intel and its shareholders will want to be acquired at this point. With so many new developments underway Intel stock could have considerable upside. If the company executes well on its foundry plans and delivers compelling new CPU and GPU chips, Intel could see an upside of almost 3x upside. On the other hand, if it fails to execute, Intel stock could see a downside to $10

While investors have their fingers crossed for a soft landing for the U.S. economy, how bad can things get if there is another recession? Our dashboard How Low Can Stocks Go During A Market Crash captures how key stocks fared during and after the last six market crashes.

[1] Returns as of 9/23/2024
[2] Cumulative total returns since the end of 2016

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