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Why Nvidia Stock Popped This Morning, Then Dropped

By Rich Smith – Dec 10, 2021 at 7:14AM

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Europe sours on Nvidia's offer to buy Arm Holdings.

What happened

Shares of semiconductor company Nvidia (NVDA 1.15%) jumped 2.1% in the first few minutes of trading Friday before starting to give back gains and turning negative later in the morning.

Business media outlet Barron's opined that investors' initial enthusiasm was sparked by a positive earnings report from Broadcom (AVGO -0.37%), which reported a modest earnings beat last night. Barron's may be right, but if you ask me, investors may also be reacting to other news.  

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Image source: Getty Images.

So what

Broadcom's beat wasn't all that big, after all, with both sales and earnings coming in less than 1% above analyst expectations. Plus, according to estimates collated by S&P Global Market Intelligence, analysts are already expecting Nvidia's earnings to more than double next year, so the fact that business is booming in semiconductor stocks shouldn't really surprise anyone.

Seems to me it's more likely that investors are confused about today's news that the European Commission is "deeply concerned" about Nvidia's attempt to buy out Arm Holdings and may be preparing to nix the deal.  

Now what

At first glance, this seems like bad news for Nvidia (and a negative investor reaction would explain why the stock is trending down). On the other hand, though, there's also reason to like today's news -- and this interpretation may be the reason for Nvidia's early pop.

Consider that when Nvidia first offered to buy Arm back in September 2020, its "$40 billion" buyout price included payment in shares covering more than half the value of the deal. But after Nvidia's explosive stock price performance over the past 15 months, media reports now value the deal at closer to $80 billion -- simply because the share portion of the buyout price has gotten so much more valuable.  

Investors who were in favor of Nvidia's buying Arm for $40 billion may no longer think this is such a great deal at $80 billion. And the clearer it becomes that regulators aren't going to let Nvidia spend that money, the happier Nvidia shareholders should be.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool owns and recommends Nvidia. The Motley Fool recommends Broadcom Ltd. The Motley Fool has a disclosure policy.

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