Earnings season is slowing down a little bit with only two semiconductor companies in our watchlist reporting this week. The messages were very consistent with what we've heard from companies over the past few weeks, strong revenue & gross margin, a growing backlog, and lean inventory. So we will skip the earnings detail and focus on M&A activities today. The two blockbuster semiconductor acquisitions dominating the news headline over the past 15 months, AMD/Xilinx and Nvidia/ARM, both came to closure this week but with very different results.
AMD announced that it had received approval from all necessary regulatory parties, and the acquisition of Xilinx will close on Monday (February 14, 2022). When AMD first announced the all-stock deal about 15 months ago, the stock was trading around $80, and the price tag for Xilinx was around $35 billion. Given the all-stock nature of the deal and AMD's current ~$120 stock price, the deal turned out to be 50% more expensive than initially thought. One could make the case that AMD is now overpaying for Xilinx, and it is better off doing a cash deal, and it is a fair point.
In addition, because of AMD's fast-growing net income over the past 15 months, the Xilinx deal will be ~10% dilutive to EPS vs. the initial assumption that it will be accretive, also a fair point. However, the 10% selloff over the past two days suggests investors focus way too much on these short-term technical details, in our opinion.
From the business perspective, AMD now has all the building blocks for high-performance computing, CPU, GPU, and FPGA, putting it in a great position competing against Intel and Nvidia. What's more, Xilinx's strong relationship with telecom equipment providers gives AMD a natural path to this important market it has yet to crack. From a financial perspective, doing an all-stock deal left AMD a solid balance sheet and many other options deploying that cash, including buybacks, dividends, or further M&A opportunities. Our gut feeling is that AMD is not done making significant acquisitions yet, given the breadth of its product portfolio still not as great as Intel (but the quality is much better), but we'll have to wait and see.
On the other hand, Nvidia officially terminated its attempt to acquire ARM. It wasn't a surprise for us and anyone we know, frankly. The deal was met with very strong opposition from regulators, competitors, and customers from the very beginning. However, Jensen Huang, Nvidia's founder and CEO, is so visionary that he gets a pass for almost anything. The general response we heard from other investors after Nvidia terminated the deal is, "we knew there's almost zero chance they can get it done from the very beginning, but we can't blame him for trying, even if it cost Nvidia over a billion dollars." The good thing is that Nvidia did not let the deal distract itself, and all its current businesses are still firing on all cylinders. The real question now is, what's Nvidia's next move with $20 billion of cash on hand and over $10 billion of free cash flow every year? Nvidia is reporting its quarterly result next week, and we hope to get some more clarity.
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