Nvidia (NVDA  ) completed the biggest chip deal in history by acquiring Arm Semiconductors from SoftBank (SFTBF  ) for $40 billion. Nvidia believes this acquisition will put the company in a stronger position to compete in the AI market. In a letter to employees, CEO and founder Jensen Huang said, "Uniting NVIDIA's AI computing with the vast reach of Arm's CPU, we will engage the giant AI opportunity ahead and advance computing from the cloud, smartphones, PCs, self-driving cars, robotics, 5G, and IoT."

Wall Street was enthusiastic about the purchase as Nvidia's market cap climbed by more than $20 billion following the announcement. Nvidia was originally focused on chips for graphics which is essentially parallel processing since each pixel needs to be different. It turned out that parallel processing has many uses include crypto, encryption, machine learning, AI, and self-driving. Many see the ARMS acquisition as Nvidia setting its sights on Intel (INTC  ).

Arm Semiconductor

Arm will operate as an independent division of Nvidia and remain headquartered in the UK. The company was bought by SoftBank for $31 billion in 2015. Its IP is used in all types of devices including Apple (AAPL  ) smartphones, Samsung phones, and Qualcomm's (QCOM  ) chips. Given that Arms' IP is in so many different chips, many of Nvidia's customers are Arm's customers. So, there's some uncertainty about how this will work, although Huang was quick to say that he wasn't going to interfere in any licensing deals.

The deal is also a sign that Nvidia is giving up its ambitions on building CPUs to compete with Intel and AMD (AMD  ). Instead, it seems likely that it will use Arms' expertise to build CPUs for phones and data centers.

Nvidia's Incredible Ascent

What's remarkable about Nvidia is that five years ago, its market cap was less than Arms. Now, its market cap is almost 10x that of Arms. Arms' primary business is to license its IP to chipmakers so the business is pretty stable with less upside and downside than most semiconductor stocks.

In contrast, Nvidia is one of the leading stocks of this bull market. It's creating the infrastructure for the fastest-growing parts of the economy, right now, like cloud computing and video games and has a leading position in future growth areas. Arms' IP is in nearly every device and it's what enables different chips to work together. With this acquisition, Nvidia will get first look at ARMS' designs, giving it a leg-up against its competitors and potentially expand into the CPU market.