The planned $40bn acquisition of UK chip designer, ARM, will no longer go ahead. NVIDIA said the deal faced ‘significant regulatory challenges preventing the consummation of the transaction, despite good faith efforts by the parties’. ARM will now look to be sold via a public offering.

As part of terms of the earlier deal, Softbank Group will keep $1.25bn prepaid by NVIDIA. NVIDIA will also keep its 20-year ARM licence.

NVIDIA shares fell 1.2% in pre-market trading following the announcement.

Headlines are focussed on the failed ARM deal. And while we can’t say we’re not disappointed – we viewed ARM’s footprint and products as great potential assets – the bigger, underlying picture is what NVIDIA investors should be thinking of.

Gaming has been enjoying a golden era and NVIDIA’s chips are right at the heart of it – its RTX 30 series has been described as “the most revolutionary graphics card in years”. But the power of NVIDIA’s chips means they’re increasingly in demand outside the world of consoles and joysticks.

The group has actively altered its mainstream chips to make them less effective for cryptocurrency mining (which was eating up global supply). But sales of its dedicated crypto cards are still booming. The ‘Professional Visualisation’ division supports digital design and engineering work in architecture, oil & gas and medical imaging. Meanwhile the DRIVE platform gives it a stake in the potentially exciting self-driving car market, with a product that can “perceive and understand in real-time what’s happening around the vehicle…and plan a safe path forward”. Both end markets have seen sales accelerate as the economy recovers from coronavirus.

However, it’s the Data Centres business which has been the real engine room of growth in recent times.

As well as powering some of the world’s most powerful supercomputers, NVIDIA produces cutting edge hardware for training artificial intelligence (AI) software. It’s this AI expertise, enhanced by the $6.9bn acquisition of Mellanox.

Looking back at the core NVIDIA business, the group enjoys a neat business model of its own. NVIDIA outsources all its manufacturing. Avoiding the costs, capital and risk associated with owning manufacturing facilities has generally helped NVIDIA deliver impressive gross margins and cash flow.

High gross margins help fund the research & development budget, which stood at $3.9bn last year. Recent innovations have included real time ray tracing, which could revolutionise Gaming graphics with ultra-realistic imagery.

With net cash on the balance sheet and hefty operating cash flows, they come across as a very high-quality business. Unusually for a US tech company, the group’s willing to return surplus cash to shareholders, mostly through share buybacks, although these are on hold at the moment. There is a very modest dividend on offer too but remember dividends are variable and not guaranteed.

Overall, it’s hard not to be impressed by a business at the cutting edge of some pioneering industries. But keep in mind all those strengths come at a price – the shares change hands on a PE ratio some way higher than the ten-year average, which increases the risks of ups and downs in the short-term