Thanks to an incredible surge in its stock price over the last 12 months, Nvidia (NVDA 1.53%) is now the third-most-valuable company in the world behind Apple and Microsoft, with a valuation of $2.2 trillion.
Nvidia's graphics processing units (GPUs) for the data center are the go-to choice for developers building, training, and deploying artificial intelligence (AI) technologies. They drove a whopping 217% increase in the company's data center revenue during fiscal 2024 (ended Jan. 31), and the momentum is expected to continue in fiscal 2025.
With all that extra cash coming in, Nvidia decided to spread some of its wealth at the end of last year by investing in five other AI companies. Do the buys point to where CEO Jensen Huang thinks the next wave of value will be created?
Image source: Nvidia.
The five AI stocks Nvidia recently bought
Nvidia filed its first-ever 13F with the Securities and Exchange Commission on Feb. 14, revealing it purchased five AI stocks in the fourth quarter of 2023 (ended Dec. 31):
- Arm Holdings (ARM 4.15%), which designs processors for the world's largest semiconductor companies.
- Nano-X Imaging, which develops AI applications to improve the field of medical imaging.
- Recursion Pharmaceuticals, which is using AI to accelerate drug discovery.
- TuSimple Holdings, which develops autonomous driving technologies for the trucking industry.
- SoundHound AI (SOUN 4.11%), which develops conversational AI technologies.
Arm received the largest investment, with Nvidia's position worth $147 million at the end of 2023. That stake has grown to $254 million based on Arm's current stock price, following its 88% year-to-date gain in 2024.
SoundHound AI received a small investment by comparison, with Nvidia's position worth just $3.7 million at the close of 2023. However, thanks to a whopping 296% gain in SoundHound stock in 2024 already, Nvidia's stake has already grown to $14.3 million.
Here's why Arm Holdings and SoundHound AI stand out among the five stocks Nvidia is backing.
NASDAQ: ARM
Key Data Points
1. Arm Holdings
Nvidia tried to acquire Arm Holdings for $40 billion back in 2020, but the deal was abandoned because regulators feared it would hurt the competitive landscape in the semiconductor industry. Arm doesn't manufacture any chips itself, but rather it designs them on behalf of some of the world's largest companies, including Nvidia and Apple.
Roughly 50% of all chips globally have an Arm-based architecture, and the company has an incredible 99% market share in the smartphone market specifically.
Nvidia is now shipping its latest H200 AI GPU for the data center, which is the successor to the industry-leading H100. However, it also offers the GH200, which pairs the GPU with an Arm-based processor. Two GH200s paired together can deliver three times more bandwidth than the H100, making it the ideal choice for accelerated AI development. The upcoming Jupiter supercomputer in Germany will use 24,000 of the GH200 chips, marking an incredible milestone in Arm's foray into AI and the data center.
Arm's investors might be glad the $40 billion deal with Nvidia fell through because the company is now valued at an impressive $133 billion. But before investors rush to buy the stock, I should point out that it's quite expensive.
Based on the company's $2.9 billion in trailing-12-month revenue, Arm trades at a price-to-sales (P/S) ratio of 45.5. That makes Arm stock even more expensive than Nvidia, which trades at a P/S ratio of 35.9. The disparity is even more concerning when factoring in Arm's expected revenue growth of 19.6% in the current fiscal year, compared to Nvidia's 80.1%.
In short, it's hard to justify paying a higher valuation for Arm stock compared to Nvidia. With that said, Arm will likely create substantial value for investors over the long term, but they might have to wait for a stock market correction to get a better entry point. If Arm stock experiences a decline of 30% or more from its current price, that might create an opportunity to buy in.
NASDAQ: SOUN
Key Data Points
2. SoundHound AI
SoundHound AI is a small company relative to Arm, with a valuation of just $2.5 billion. But it's packed with potential thanks to its conversational AI technology, which is designed to recognize voice prompts and respond in kind.
SoundHound serves some of the giants of the hospitality industry, where its AI automates drive-thru ordering, phone ordering, and in-store ordering. Its unique Employee Assist technology also stands ready to converse with staff members, answering their questions to speed up everything from customer service to in-store operations.
Jersey Mike's, White Castle, and Krispy Kreme are just some of the restaurant chains using SoundHound's technology. The company also has partnerships with Toast, Block's Square, and Olo, which serve as distribution channels for SoundHound's technology.
SoundHound also has an automotive solution used by giants like Mercedes-Benz and Stellantis to create powerful virtual assistants for drivers. However, SoundHound just announced a new partnership with Nvidia's Drive platform, which will allow car manufacturers to deliver generative AI on the edge. That means drivers won't need network connectivity to use their voice assistant, broadening the number of use cases and improving important features like privacy.
Drivers will be able to converse with their AI assistant to instantly access information about their car's features. It can also help them book restaurants and plan vacations, among a long list of other things.
Like Arm, SoundHound stock is quite expensive following its significant run-up this year. The company generated $45.9 million in revenue during 2023, and while that was an impressive 47% year-over-year increase, it places SoundHound stock at a P/S ratio of 55.5. However, the company did have an enormous order backlog worth $661 million at the end of 2023, which doubled compared to where it was in 2022.
That implies SoundHound's revenue could scale up rather quickly from here, meaning investors who can hold the stock for the next few years might still do well despite its sky-high valuation. After all, the company does have Nvidia in its corner as both a partner and a shareholder.
