NVIDIA (NVDA 6.18%) is flying high right now, riding a new hardware upgrade cycle driven by its graphics processing units (GPUs) for high-end video games and data centers in need of a computing update. The semiconductor leader isn't letting its foot off the gas, either, with its pending $40 billion acquisition of chip design licensor ARM Holdings from Softbank (SFTBF -0.02%).
As manufactured goods -- even innovative chip technology -- eventually get commoditized and lose their value over time, ARM will help NVIDIA solve this future problem in 2021 and beyond.
Big tech suppliers battling big tech product retailers
Apple (AAPL -0.35%) recently unveiled its own lineup of Mac processors, the M1, making its debut in late 2020. Manufacturing chips is historically a capital intensive activity, and that isn't changing. However, firing up an industrial operation like this is possible for big tech companies like Apple.
This is possible with some help from technology licensing. Designs can be licensed from none other than ARM, Apple can customize those designs, and the actual fabrication can be farmed out to Taiwan Semiconductor, the largest and most technologically advanced semiconductor fabricator in the world. In this case, Intel and its unified design and manufacturing operation is losing out as a result of the new Mac chips.
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Apple isn't alone. Alphabet's Google is also reportedly working on something similar for its Pixel devices -- again tapping ARM in the process. NVIDIA itself is also a customer, basing some of its new data center silicon on ARM designs. These are still high-value semiconductors, but big tech is demonstrating it can pull of a coup of sorts against traditional chip makers and designers, and illustrates the challenge these modern marvels of manufacturing face on the road ahead.
NVIDIA's proposed tie-up with ARM thus makes sense, and not just because NVIDIA would gain access to new markets like CPUs for mobile as early as 2021. It's all about the business model (chip technology licensing and royalty payments earned whenever a chip is manufactured) and staving off future disruption like what Intel is trying to manage. Sure, an NVIDIA-ARM combination will face regulatory hurdles and concerns raised from ARM's customers -- many of them NVIDIA's competitors like AMD and Marvell Technology Group. But NVIDIA's vision nonetheless would set it up for many years of disruption-proofing with a new business model it can tap.
Visionary thinking is powerful
This kind of forward thinking is why NVIDIA and CEO Jensen Huang have been so successful the last decade. NVIDIA's new chips aimed at data centers were years in the making, but fortuitous given how important cloud computing has become, and the massive potential AI has ahead of it. Going after design licensing from ARM is further future-proofing and will build on the impressive research and development empire NVIDIA has already established. Huang has stated ARM's research into new chip designs will be expanded upon and kept open. Given the direction chip manufacturing is headed, I personally believe Huang's statements and intention for the ARM prize.
Of course, ARM isn't NVIDIA's sole ace in the hole. It's become clear the company has other ideas aimed at years of growth and decades of technology leadership. One of them is the recent push into software technology, like its announced platform for video conferencing providers, a remote work collaboration tool, and cloud-based autonomous vehicle services for automakers.
But as for hardware specifically, the bet on ARM signals NVIDIA's future shift toward licensing of technology -- a far more stable business model than the traditionally cyclical nature of semiconductor industry sales driven by upgrade cycles. While the ultimate fate of the acquisition is uncertain while regulators around the world take a look, tie-up or not, I like NVIDIA's far-reaching foresight into where tech trends are headed in 2021 and well beyond.
