Why Nvidia Stock Rocketed Today

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The Motley Fool

What happened

Shares of Nvidia (NASDAQ: NVDA) stock closed down 4.5% on Tuesday after Bloomberg reported that Nvidia's $40 billion bid to buy Britain's Arm Holdings is all but dead.

Nvidia may abandon the deal, said Bloomberg, and SoftBank -- Arm's seller -- is already contemplating putting Arm up for an initial public offering instead. But with Nvidia stock bouncing back today, and back up 4.7% as of 10:40 a.m. ET, it's looking like some investors may have decided this is actually good news for Nvidia.

Image source: Getty Images.

So what

Why might that be?

When Nvidia announced its intention to purchase Arm back in September 2020, the company explained that it would meet 70% of its $40 billion purchase price by paying in shares. As much as $28 billion of the $40 billion, in fact, would be paid in Nvidia stock.

But on Sept. 13, 2020, when Nvidia announced this deal, Nvidia shares were selling for just $122 per share. Today, those same shares cost 90% more -- $232.50. Logically, therefore, the same deal that was valued at $40 billion 16 months ago must now be worth more like $65 billion to Nvidia.

Now what

What does this mean for Nvidia and its shareholders? Well, not to put too fine a point on it, but if this deal doesn't go through, they will end up saving about $25.2 billion that they never expected to spend on Arm in the first place.

Granted, the news isn't all good. Nvidia will still be out its $2 billion downpayment on the transaction, and will have to pay a further $1.25 billion "breakup fee" when it walks away from this deal. But even so, $25.2 billion minus $2 billion minus $1.25 billion means Nvidia still saves about $22 billion when its Arm deal collapses.

I'd say that's good news for Nvidia. And I'd say it's a pretty decent reason for bidding up the price of Nvidia shares today.

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Rich Smith has no position in any of the stocks mentioned. The Motley Fool owns and recommends Nvidia and SoftBank Group Corp. The Motley Fool recommends Softbank Group. The Motley Fool has a disclosure policy .

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