Nvidia (NASDAQ: NVDA) has created an incredible amount of value over the last 18 months. It was a $360 billion company at the beginning of 2023, but it now stands alongside Apple and Microsoft in the $3 trillion club.
The 826% surge in Nvidia’s stock price over that period was driven by red-hot demand for its data center graphics chips (GPUs), which are designed for developing artificial intelligence (AI) models. In the recent first quarter of fiscal 2025 (ended April 28), they sent Nvidia’s data center revenue higher by 427% year over year, to a record $22.6 billion.
At the end of last year, Nvidia decided to spread some of its newly acquired wealth by investing in five other AI companies. The moves could indicate where CEO Jensen Huang thinks the next wave of value will be created in the AI space.
The five stocks Nvidia bought at the end of 2023
According to a 13F filing with the Securities and Exchange commission on Feb. 14, Nvidia invested in the following five stocks in the fourth quarter of 2023:
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Arm Holdings (NASDAQ: ARM), which designs processors for chip giants like Nvidia.
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SoundHound AI (NASDAQ: SOUN), which develops virtual assistants based on its conversational AI technology.
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Nano-X Imaging, which is improving medical imaging using AI.
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Recursion Pharmaceuticals, which is accelerating drug discovery through AI.
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TuSimple Holdings, which develops autonomous driving for the trucking and logistics industries. However, Nvidia recently sold this holding according to its latest 13F filing issued on May 15.
Nvidia’s position in Arm was worth $147 million at the end of 2023, but it has since grown to $268 million thanks to a 98% gain in the stock so far in 2024. Arm is Nvidia’s largest holding.
SoundHound received a smaller investment, with Nvidia’s position worth $3.7 million at the close of 2023. But SoundHound stock has soared 123% this year so far, catapulting the value of Nvidia’s holding to $8 million.
Here’s why Arm and SoundHound stand out among the four stocks Nvidia currently holds.
1. Arm Holdings
Arm built the architecture that companies like Nvidia, Advanced Micro Devices, and even iPhone giant Apple use to design their chips. Four years ago, Nvidia tried to buy Arm outright for $40 billion, but the deal was squashed because regulators felt it was anti-competitive. Considering Arm now has a market cap of $143 billion, Nvidia missed out on a real bargain.
Arm is the world’s most popular architecture for central processing units (CPUs). A staggering 99% of smartphones use Arm-designed chips, and the company’s CEO recently told Reuters it could capture 50% of the Windows PC market within five years. Microsoft is stoking demand for Arm’s technical expertise because it’s quickly integrating AI into the Windows operating system (and its own PCs and devices), which calls for next-generation chip hardware.
Nvidia recently launched a new GPU architecture called Blackwell, which is the foundation of its advanced GB200 superchip. The GB200 combines two Nvidia GPUs with two Arm-designed CPUs, capable of inferencing AI models five times faster than its H100 GPU, which is currently the dominant AI data center chip. Therefore, Arm isn’t just a dominant force in consumer electronics, but also in the servers responsible for producing the world’s most advanced AI models.
Arm generated $3.2 billion in revenue during fiscal 2024 (ended March 31), which was a 21% increase from fiscal 2023. While that is a solid growth rate, and the company is undoubtedly critical to the future of AI, investors should be aware its stock is quite expensive.
Based on Arm’s $3.2 billion in revenue and its $143 billion market cap, its stock trades at a price-to-sales (P/S) ratio of around 44. By comparison, Nvidia’s P/S ratio about 37, and it’s expected to grow its revenue by 98% this fiscal year. In other words, it’s hard to justify paying a higher valuation for Arm compared to Nvidia when Arm is growing its revenue at a much slower pace.
Remember, Nvidia’s late-2023 investment in Arm stock was at roughly half the price it trades at today, which represented a more reasonable valuation. It doesn’t look nearly as attractive now, so investors should probably wait for a pullback before buying in.
2. SoundHound AI
SoundHound AI is using voice recognition technology to create a portfolio of AI-powered virtual assistants. They can recognize voice-based prompts and respond in kind, which means they can hold entire conversations without the user typing a single word. The company has developed its own AI models, but it also integrates those from leading third parties like OpenAI.
The restaurant industry is using SoundHound to autonomously accept customer orders over the phone, at the drive-thru, and in-store. SoundHound has also started deploying the new Employee Assist tool, which workers can call upon anytime to instantly access everything from store policies to instructions for making an item of food or drink. Krispy Kreme, Chipotle Mexican Grill, and Papa John’s are just some of SoundHound’s customers.
SoundHound’s technology is live in 10,000 locations already, with 100,000 more in the pipeline. However, the company believes its addressable market consists of more than 1 million restaurants and 30 million other businesses across North America, translating to an opportunity worth $100 billion.
The company also created an AI voice assistant for cars. Manufacturers like Mercedes-Benz and Stellantis (Alfa Romeo, Jeep, Dodge) already use it, allowing drivers to ask questions on a range of topics, and even access information about the features in their vehicle.
SoundHound is also now partnered with Nvidia’s Drive platform to deliver AI on the edge, meaning drivers won’t need network connectivity to access their AI assistant. It broadens the number of use cases and also improves privacy because conversations remain in a closed loop.
The stock trades at a slightly more reasonable valuation than Arm. Based on its trailing-12-month revenue of $50.8 million and its market capitalization of $1.5 billion, its P/S ratio is just over 30. However, the company is losing quite a bit of money, including $33 million in the recent first quarter of 2024 alone. With just $226 million in cash on hand, it might have to raise more cash through an equity offering in the future, which will dilute existing investors. That’s an important risk to consider.
On the plus side, the company does have a large order backlog worth $682 million, which should convert to revenue over time. However, investors who want to follow Nvidia in this stock should keep their position size relatively small to account for the risks.
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Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Apple, Chipotle Mexican Grill, Microsoft, and Nvidia. The Motley Fool recommends Stellantis and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
Nvidia Recently Bought 5 Artificial Intelligence (AI) Stocks. These 2 Stand Above the Rest. was originally published by The Motley Fool
Source: finance.yahoo.com