Even though it's one of the hottest and most-discussed artificial technology (AI) stocks around, most investors probably don't know that Nvidia (NVDA 6.18%) is an aspiring competitor in the field of biotechnology. But it's not about to start developing drugs. Instead, it's helping biotechs and pharma businesses discover the best candidates to develop into medicines using its computing resources and several AI tools built for the purpose.
Does this juggernaut's ongoing diversification into a new sector bolster the bull thesis for buying it, or is it doomed to be a victim of di-worse-ification and the inefficiencies that follow? Let's answer that question by analyzing exactly what Nvidia is planning to do, who's collaborating with it, and how much money it's making as a result.
Driving major revenue growth will take time
The first thing for investors to appreciate about Nvidia's biopharma services segment is that it isn't even mentioned in the company's first-quarter earnings report for its fiscal 2024 year. In its investor materials, biopharma services are likely lumped into the category of "other revenue," which accounted for around 1% of its roughly $7 billion in sales for Q1. So this isn't an opportunity that's going to be immediately exciting -- more likely, it will be a slow-burning contributor to its voracious growth, at least for now.
Nonetheless, companies you've probably heard of, like Regeneron Pharmaceuticals, are using Nvidia's AI technology for applications in genomic analysis. Amgen is already using those platforms to discover new candidates for safe and effective biologic medicines, and other big pharmas are sure to follow.
Elsewhere in the healthcare sector, Medtronic is using the company's AI products for medical device design and testing, too. In the long term, recurring revenue from providing the cloud services used by these players won't require much spending to achieve, though ongoing research and development (R&D) spending will likely be necessary.
On that note, the company is also working with well-known AI-for-drug-discovery biotechs like Recursion Pharmaceuticals and Schrodinger to empower and improve its own AI-enabled drug discovery platforms, which can predict and simulate molecular interactions to a high degree of fidelity. But for now, a handful of its biotech-targeted services are in early access. That means the majority of the growth is in the future, and it might start to pick up quite soon.
Should you buy it?
As great as all of the above sounds, it's too early in the game to know how big of a segment Nvidia's biopharma discovery services will eventually become. It's no question that this company is in a phase of meteoric ascent. But for investors considering a purchase, that's a double-edged sword.
Right now, its price-to-earnings (P/E) multiple is a positively stratospheric 232. The growth stemming from helping biotechs with drug discovery is unlikely to be rapid enough to justify that valuation in the near term, though it's (remotely) possible that the company's other segments could. This is perhaps the most-hyped stock in an exuberant period of mounting hype surrounding AI.
Buying it at the moment means hoping that the AI hype accelerates. So unless you're willing to risk a massive drawdown when that hype train derails -- and eventually it probably will -- it's probably best to avoid buying this stock at the moment. Again: This isn't a stock for investors who have problems sleeping at night if their investments are down.
On the other hand, if you're willing to hold onto your shares of Nvidia for years to come regardless of what happens in the short term, you'll likely get the benefit of share price appreciation driven by its AI services for drug discovery -- among many other drivers, which might be much larger.
