The artificial intelligence (AI) narrative is primarily concentrated in a small basket of stocks called the "Magnificent Seven". Indeed, Microsoft, Apple, Alphabet, Tesla, Amazon, and Meta Platforms are all disrupting AI in their own unique ways.
But among megacap tech companies, perhaps the most important player is Nvidia (NVDA +2.59%). The semiconductor manufacturer is at the forefront of generative AI -- its graphics processing units (GPUs) and data center operations are playing a critical role in accelerated computing, machine learning, and more.
After generating record revenue in 2023, Nvidia is sitting on a $26 billion cash pile. Let's see how the company is investing its profits to help position itself for long-term growth.
NASDAQ: NVDA
Key Data Points
1. Voice recognition software
A couple of weeks ago, investors learned that Nvidia has a small ownership position in a company called SoundHound AI (SOUN 1.76%), a developer of voice-recognition software. The company works with automobile manufacturers and restaurants, and its software can be integrated into smart devices.
Big tech has shown a keen interest in voice-powered assistants for many years. Apple acquired both Siri and Shazam, while Microsoft acquired Nuance in 2021 for nearly $20 billion. Moreover, both Amazon and Alphabet leverage the technology for their respective lines of smart home appliances.
Considering that other major tech players have invested in technologies similar to SoundHound AI's, and the projected market size is $50 billion, it's easy to see why Nvidia is making its move now -- as use cases for AI continue to evolve.
Image source: Getty Images.
2. Humanoid robotics
Nvidia swiftly followed the news about SoundHound AI with an investment in a start-up called Figure AI. Figure AI is developing humanoid robots, similar to Tesla's Optimus robot.
Although humanoid robots aren't commercially applied today, many companies are investing heavily in the technology. One reason could be that the addressable market is expected to reach $38 billion over the next decade, according to research conducted by Goldman Sachs.
There are likely a few key reasons why Nvidia is interested in Figure AI. The combination of Nvidia's chips and its under-the-radar software business could play a unique role in developing Figure AI's robotics ambitions.
Moreover, the investment by Nvidia is an important step as the company seeks to grow beyond GPUs. While I see the chip business as its bread and butter, Nvidia will have to demonstrate that it has alternative products and services that can scale as competition in the AI landscape heats up.
3. Enterprise software
Many investors see Nvidia as primarily a hardware business, but one of the most overlooked areas the company is exploring is enterprise software. In September, Nvidia participated in a $500 million funding round for artificial intelligence (AI) software company Databricks.
Following the investment, Nvidia's CEO Jensen Huang said that "enterprise data is a gold mine for generative AI."
Databricks adds a new layer for Nvidia's enterprise software services business, which is already operating at an annual revenue run rate of $1 billion. This is an important relationship for Nvidia to nurture as demand for AI-powered services continues to surge, and I don't think the partnership should be overlooked.
4. New product innovation
Nvidia's A100 and H100 chips have played a major role in its growth over the last year. However, despite the popularity of these semiconductor models, the company is already designing even better technology.
It's marketing its next-generation chips under the moniker Blackwell. Of particular interest, Nvidia's H200 chips reportedly double the inferencing performance of the H100. During the company's fourth-quarter earnings call, management told investors that the H200 chips are already witnessing strong demand, and Nvidia is planning to launch in the second quarter.
Following the release of the H200, Nvidia is planning to encore with its most powerful chip yet later this year.
5. Supply chain
The last area that Nvidia is investing in is the supply chain. Semiconductor businesses are generally cyclical, given their exposure to broader trends in technology spending and manufacturing. Over the last few years, supply chains and logistics efforts have become strained due to a mixture of COVID-induced disruption and geopolitical tensions. Nvidia has not been immune to these challenges.
In order to keep up with surging demand, Nvidia has had to make some concessions on the cost side of the house. The company has been ratcheting up its spending in order to fulfill backlog. While this includes sourcing components for chips, it's important to note that Nvidia does not make its own chips. Instead, they outsource this part of the supply chain to Taiwan Semiconductor. Given Nvidia's heavy reliance on Taiwan Semiconductor's fabrication facilities, it's going to very important that this relationship remains strong.
