Leading semiconductor designer and now the embodiment of all things artificial intelligence (AI), Nvidia (NVDA 3.34%), has become a battleground stock. Sure, the company's meteoric revenue and profit growth are the real deal. However, the jury is now out on how long this upcycle can last.
In recent years, Nvidia has gone through numerous vicious cycles of explosive growth, followed by periods of decline -- driven by upgrades to PC video gaming hardware, the cryptocurrency boom and bust, and now generative AI. Suffice to say that at some point, Nvidia will undergo another downturn.
However, it's hard to deny just how embedded the company has become in the economy. Nvidia has been spreading its AI-fueled windfall around in recent months, and it could be a misunderstood way profits could continue to churn higher in the next decade and beyond.
Nvidia's growing cash and equity hoard
Thanks to many years of development in AI, Nvidia is now reporting record profits and profit margin as its sales soar. The company hasn't provided specific guidance for the full calendar year 2023, much less 2024, but indications point toward a gradual climb from the last quarterly update (the second quarter of fiscal 2024 which ended in July 2023).
Data by YCharts.
Those profits are helping to quickly replenish the balance sheet. As of the end of July, cash and short-term investments (mostly in the form of U.S. Treasuries and other short-term debt that pays interest) totaled $16 billion (versus $13 billion six months prior at the start of Nvidia's fiscal year). Total debt stood at $9.7 billion (just shy of $11 billion at the start of the year).
However, as with most big corporations, Nvidia's most liquid assets don't stop with cash and short-term investments. It also uses some of the cash rolling in to make investments in other companies, too. As of July, it reported having $800 million worth of equity investments in non-affiliated entities, compared to just $299 million at the start of its fiscal year. That's all due to Nvidia boosting its investment stake in other companies, not gains in valuation of its investments, since it actually reported a $45 million loss on investments in non-affiliates in the first half of fiscal 2024.
Spreading cash around the growing AI universe
Of the $800 million Nvidia had in investments in other companies at the end of July, it reported $124 million in publicly traded stocks, and $676 million in privately held companies. That figure is almost certainly going to be higher when Q3 is reported.
The list of start-ups Nvidia has spread cash around this past summer and autumn is impressive. It's been infusing cash into numerous AI-focused cloud computing start-ups like CoreWeave early in the year, followed later by investments in Cohere, and it was reportedly working on a deal to invest in AI cloud company Lambda Labs. It invested in a South Korean generative AI start-up called Twelve Labs, was a lead in funding AI studio Inflection AI, and invested in a start-up making tools to lower the cost of AI training called CentML.
Even more notable, Nvidia announced in July a $50 million investment in Recursion Pharmaceuticals for AI in drug discovery. It invested in Databricks, a competitor to Snowflake, which is working on an initial public offering (IPO). It made a bet on a start-up called Enfabrica working on networking chips for AI and other high-performance data center computing. And recently, Nvidia announced an investment into a 3D printing and manufacturing tech start-up called Seurat.
Why is Nvidia going wild with non-Nvidia AI bets?
There have been other investments made, but you get the idea. The AI chip designer is making widespread bets. Why? I see three basic reasons:
- Nvidia could be betting early on a future big winner, which would trickle down to extra net income (in the form of stock and equity gains if the businesses' valuations grow). This is how venture capital works -- spread the money among many dozens of start-ups, and wait for a few of them to take off.
- Perhaps one of these early bets could lead to a future acquisition. After all, like any big technologist, Nvidia makes the occasional purchase of a smaller company -- either for some key tech it can use in its own operations, or to supplement its own growth trajectory. A good example of that would be Nvidia's purchase of Mellanox in 2020, which has quickly become a pillar of its data center and AI business today.
- And finally, investing in numerous start-ups could help with the placement of future products. You can imagine taking the call: "Hi this is Nvidia, one of your leading investors that gave you cash to grow your business. We have some new semiconductor tech we'd like to show you." In other words, investing in start-ups helps with sales and distribution.
Either way, Nvidia's rise in AI this year could have far-reaching implications as it starts to do some of the things other big tech giants have done to get where they are: use cash as an investor in the start-up community to deepen its reach in the economy overall. That won't change Nvidia being a cyclical company going forward, but it lends to the argument that Nvidia will always rise from those cyclical slumps with a vengeance.
