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NVIDIA's $40 Billion Splurge Could Supercharge This Business

By Harsh Chauhan – Sep 28, 2020 at 9:48AM

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The impending acquisition of Arm could give the graphics specialist's slowing automotive business a fresh lease on life.

NVIDIA (NVDA -2.30%) has been on fire this year thanks to the rapid growth of its video gaming and data center businesses, but the company has lost momentum in one area despite being one of the early movers in that space.

The graphics specialist was anticipated to win big from autonomous cars thanks to the impressive partnerships that it had struck years earlier. But the business failed to take off despite NVIDIA's early promise -- which isn't surprising, as autonomous cars are taking longer than expected to hit prime time due to the complexities involved in their development.

However, NVIDIA now has a chance to inject some life into the automotive business once it closes the $40 billion purchase of Arm Limited from SoftBank. Let's see why.

Person reading a book inside a self-driving car.

Image source: Getty Images

NVIDIA is trying to regain its automotive mojo

NVIDIA's automotive business accounted for just 2.9% of the company's revenue in the second quarter of fiscal 2021. The segment's revenue fell nearly 47% from the prior-year period to $111 million during the quarter as the novel coronavirus pandemic wrecked the global auto industry.

However, NVIDIA's automotive business was huffing and puffing even before the pandemic arrived, clocking erratic growth rates and witnessing declining revenue after hitting a peak in the second quarter of fiscal 2020.

Chart showing NVIDIA's quarterly automotive revenue.

Data from NVIDIA's quarterly report. Chart by Author. FY=Fiscal year. Q=Quarter

However, the chipmaker has been working on a new business model in the automotive sector by moving away from supplying commoditized chips to delivering end-to-end platforms to automakers and developers interested in autonomous vehicle (AV) development. The switch to a different automotive model has shown signs of promise: NVIDIA struck a partnership with Daimler AG-owned (DMLR.Y 1.23%) Mercedes-Benz in June to build a software-defined architecture to power the German giant's next-generation fleet of cars beginning in 2024.

NVIDIA will build the artificial intelligence (AI) computing infrastructure and the self-driving applications for Mercedes-Benz using its DRIVE autonomous driving platform, unveiled earlier this year. The automaker says that the NVIDIA DRIVE-enabled self-driving architecture will be standard across the company's fleet.

So Mercedes-Benz could give NVIDIA's automotive business a shot in the arm, though it will take a few years for the partnership to move the needle for the chipmaker. However, the pending acquisition of Arm could help NVIDIA accelerate its automotive development, as the former already has a wide presence in this space.

Arm's automotive advantage

One of the key reasons why NVIDIA has decided to buy Arm is because it believes that the combined expertise of both companies could help them make a dent in AI development. After all, Arm has already been working on automotive AI through various partners.

For instance, the likes of Qualcomm, Samsung, Daimler, Audi, NXP Semiconductors, and MediaTek have already been associated with Arm for their self-driving car development. Arm has also been making a stronger push into self-driving car development itself of late. It introduced a new chip design meant to handle data streams coming out of the sensors of an autonomous car in real-time in late 2018.

Last year, Arm announced a partnership with Toyota and General Motors to standardize chips and systems that could go into self-driving cars. The group is looking to create a common architecture that could enable automotive original equipment manufacturers (OEMs) to develop a standard self-driving software that can support hardware from different vendors.

Arm is expected to complement NVIDIA's self-driving initiatives thanks to the former's army of more than 13 million developers, who can now use the graphics specialist's existing expertise in autonomous hardware and its software computing stack. As a result, NVIDIA's AV computing stack could get stronger and help the company unlock a huge opportunity that it believes could be worth billions in the coming years.

According to NVIDIA, the total addressable market for the AV computing stack could hit $25 billion by 2025. So all is not lost for the tech giant's automotive segment, and its latest acquisition could act as a catalyst for overall growth.

Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends NVIDIA and Qualcomm. The Motley Fool recommends NXP Semiconductors and Softbank Group. The Motley Fool has a disclosure policy.

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