Nvidia (NVDA 6.18%) has been the undisputed winner in the early innings of the artificial intelligence (AI) revolution. Last month, the company released a regulatory filing divulging stakes in several AI stocks, and investors took notice. Nvidia filed its first-ever 13F with the Securities and Exchange Commission (SEC) on Feb. 14, which was triggered when the total value of these holdings exceeded $100 million for the quarter ended Dec. 31.
Given the company's track record of success in the field of AI, it isn't surprising investors would be keenly interested in the stocks that make up Nvidia's own AI portfolio. Here's a quick rundown of the five stocks that made the cut and the one that attracted the vast majority of Nvidia's investment.
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An eclectic bunch
- Nano-X Imaging developed a more cost-effective X-ray machine that leverages AI to help provide more accurate diagnoses. This is Nvidia's smallest stake, currently valued at $553,000.
- TuSimple Holdings developed a self-driving semitruck to haul freight, though it has since been delisted and taken private. This is Nvidia's second-smallest stake, worth nearly $1.7 million.
- SoundHound AI develops conversational and voice recognition AI solutions for the auto and restaurant industries. The stake is currently valued at roughly $10 million.
- Recursion Pharmaceuticals is a biotech company that uses AI to inform its drug discovery effort. This is Nvidia's second-largest stake at roughly $81 million.
Meet the biggest and the best
The last stock in the portfolio shouldn't come as any surprise to Nvidia investors. That stock is Arm Holdings (ARM 4.11%). Nvidia owns a stake in Arm Holdings that's currently worth roughly $253 million -- more than 2.5 times the worth of all its other holdings, combined. This helps illustrate the confidence Nvidia has in Arm's future trajectory.
Investors will recall that in late 2020, Nvidia made a very public bid to acquire Arm Holdings for $40 billion, though the deal was ultimately quashed by regulators in early 2022. After the acquisition fell through, Arm Holdings went public in September 2023. Even before the IPO, however, Arm revealed that Nvidia had "expressed interest" in buying shares.
What made Arm such an attractive target for Nvidia? Primarily the company's deep ties to technology and AI. Arm's processor designs are at the heart of nearly every smartphone on the market today, and its processor designs are integrated into a laundry list of devices, including tablets, smart TVs, and personal computers.
From an AI standpoint, its chip blueprints are an essential component of hyperscale computing, cloud computing, and data centers -- where the vast majority of AI processing takes place. Arm-designed central processing units (CPUs) are a key part of AI systems. For example, Nvidia's state-of-the-art Grace Blackwell GB200 Superchip contains 36 Grace CPUs, each containing 72 Arm version 9 (v9) cores. That's a lot of number-crunching muscle in a single package. Arm CEO Rene Haas has noted that the v9 provides greater computing power than its predecessor, as well as twice the royalty rate -- which means Arm gets paid twice as much for each one used.
An AI powerhouse
Those doing the math at home can easily see how quickly that adds up for Arm. For its fiscal 2024 third quarter, Arm delivered record revenue of $824 million, up 14% year over year, which drove adjusted earnings per share (EPS) up 32% to $0.29. But that tells only part of the story.
Arm's remaining performance obligation (RPO), which includes contractually obligated revenue that hasn't been recognized, is a forward-looking indicator -- and the future looks good. In the third quarter, RPO climbed to $2.43 billion, up 38% year over year.
The company expects its growth spurt to continue. In the fourth quarter, Arm is guiding for revenue of between $850 million and $900 million, which would represent growth of between 34% and 42% -- easily outpacing the third quarter's 14% growth.
There is the matter of valuation, which requires some context. Arm is currently selling for 1,700 times earnings and 45 times sales. While this seems ridiculously expensive, it doesn't take into account Arm's projected growth rate. In terms of Arm's forward price/earnings-to-growth (PEG) ratio, it sells at a valuation of less than 1 -- the standard for an undervalued stock. Given the disparity, some investors will understandably be put off by the (seemingly) frothy valuation.
This metric suggests that the AI gold rush is just beginning for Arm Holdings. Given the depth of its business dealings, Nvidia would have known this, so it isn't too surprising that Arm would have attracted Nvidia's buyout attempt and its biggest stock-based investment.
