With A $35 Billion 'War Chest', Will NVIDIA Eye Any Acquisition In The Future?

Thanks to the AI boom, NVIDIA (NVDA.US) is raking in profits. The chip company, valued at $3.6 trillion, is increasing its spending on dividends and buybacks, yet its cash reserves continue to grow. NVIDIA's cash reserves have doubled over the past year to $35 billion. With the incoming President Donald Trump easing regulations, NVIDIA may consider mergers and acquisitions again.

Since 2020, NVIDIA's cash has grown fivefold due to an eightfold increase in revenue. The cash may continue to accumulate. Bank of America analysts predict NVIDIA's free cash flow will reach $20 billion or more over the next two years. At the current pace, dividends and stock buybacks over two years will consume about $60 billion, meaning the company's net funds will increase by about $14 billion.

Adding to its existing substantial funds, NVIDIA will have about $175 billion in idle liquid funds by early 2027, even more than the current cash king Apple (AAPL.US). Coupled with NVIDIA's high valuation, this provides ample firepower for mergers and acquisitions.

NVIDIA's last major deal attempt was in 2020 when it agreed to acquire chip architecture company Arm (ARM.US) for $40 billion in cash and stock. NVIDIA hoped to use the British company's fundamental semiconductor designs to help improve the energy efficiency of data centers. However, the merger was declared a failure after regulators in the United States, the United Kingdom, and the European Union raised concerns.

However, analysts believe that under the new Trump administration, NVIDIA may have an easier time, especially if the deals it proposes would consolidate the United States' position in the field of artificial intelligence. However, acquiring another chipmaker may still be prohibited. If NVIDIA attempts to acquire companies with scarce technology like Marvell Technology (MRVL.US) or Arm, Europe may object.

NVIDIA may also venture into other areas. NVIDIA's most recent successful acquisition was the $6.9 billion purchase of Mellanox Technologies in 2019, which provides some clues about the company's potential acquisitions. NVIDIA acquired the networking company because it saw computing shifting from parallel work on a single processor to a broader distribution of work across different chips.

These different devices must communicate with each other, and Mellanox provides the equipment that facilitates these interactions. Given the enormous workload of training and using AI models, this trend is strengthening. Therefore, Cyran believes that NVIDIA could theoretically spend $16 billion to acquire Coherent (COHR.US), a photonic networking company, whose technology can quickly connect data center servers.

Additionally, NVIDIA founder Jensen Huang has demonstrated an extraordinary ability to foresee major technological changes, and he may choose more unusual directions. As NVIDIA's chips improve, computing costs are roughly halved every two and a half years. This trend could continue for some time, making hardware cheaper and more widespread, allowing more AI chips to appear outside of data centers. This is why Huang repeatedly talks about new markets such as robotics, autonomous driving, and drug development. NVIDIA is increasing its venture capital investments, having already invested in analytics company Databricks, robotics company Serve Robotics and Figure, and drug development company Charm Therapeutics.

Of course, analysts' predictions for NVIDIA may prove to be overly optimistic. Artificial intelligence has developed rapidly in recent years, largely due to significant investments by large companies. Some analysts warn that diminishing returns on investment could lead to reduced demand for AI chips. Another risk for NVIDIA is that tech giants like Microsoft and Amazon may turn to in-house development. If the above scenarios come to pass, the growth rate of NVIDIA's cash reserves may be lower than currently expected.

On the other hand, a less optimistic outlook may even add fuel to Huang's merger and acquisition activities, as he has a track record of quickly turning businesses around. NVIDIA's current cash reserves exceed the market value of nearly half of the companies in the S&P 500 index; if Huang chooses to stand still, it would greatly surprise the market.