The chipmaker made a lot of noise the last time it invested in an AI company. Will history repeat itself?
When it comes to artificial intelligence (AI), there's Nvidia (NVDA 1.40%) and then there's everyone else. The chipmaker has become the poster child for AI, with its graphics processing units (GPUs) becoming the gold standard for AI systems, so when Nvidia invests in anything AI-related, investors take notice.
That's exactly what happened with SoundHound AI earlier this year: In February, investors learned that Nvidia had made a small investment in the voice and audio recognition specialist, and its shares soared, up 93% in the week following the revelation.
Now history is repeating itself. Last month, Nvidia announced it had acquired a sizable stake in Serve Robotics (SERV -2.45%), sending the company's shares soaring. Let's take a look at why Nvidia invested in the company and whether it makes sense for investors.
Serve Robotics' sidewalk delivery robot. Image courtesy of Serve Robotics.
Serve hot.
Saab Robotics describes itself as “the leading autonomous curbside delivery company.” The company went public without much fanfare on April 18, offering 10 million common shares at $4 each. The stock initially flew under the radar and interest was low, causing it to close its first day of trading down 22%.
The company is focused on using robots and drones for last-mile delivery, a market that management sees as $450 billion. For example, the company estimates that the average distance for a food delivery in the U.S. is 2.5 miles. What's more, it claims that the average cost of covering that distance using an autonomous robot would be about $1, far cheaper than existing alternatives and would also reduce greenhouse gas emissions from cars.
Saab first launched its fleet of sidewalk delivery robots in Los Angeles in 2020. By the end of the year, the robots had completed more than 10,000 deliveries for Postmates, the food delivery service now owned by Uber Technologies Inc.
Uber has a commercial partnership agreement with Serve to deploy up to 2,000 delivery robots by 2025, up from Serve's current fleet of about 100. The expansion will see at least 250 robots in Los Angeles by the first quarter of 2025, with rollout to new geographic markets starting in the second quarter.
Nvidia isn't alone
In a regulatory filing on July 18, Nvidia disclosed that it owned more than 3.7 million shares of Serve Robotics, representing a 10% stake in the company that was valued at about $10 million at the time. Rumors of Nvidia's investment have stoked interest in the small company, sending its shares up 335% (as of Thursday's market close). But several developments in recent weeks have further excited investors, and they're not just about Nvidia.
This week, Serve announced a partnership with Shake Shack to deliver food orders through Uber Eats in Los Angeles. Partnering with a well-known fast-casual chain like Shake Shack is a major win for Serve, raising the company's profile in the food delivery space.
The announcement came on the heels of Saab Robotics' second-quarter results, which beat expectations. The company generated revenue of $470,000, including $300,000 from licensing robotics technology from auto parts supplier Magna. Delivery revenue was $170,000, up 178% year over year and 80% quarter over quarter. At the same time, the division's gross profit increased 85% year over year and 64% quarter over quarter.
Driving the financial results were strong operational performance. Serve's average daily delivery hours were 385 hours during the quarter, up 106% year-over-year and 28% quarter-over-quarter. The company also grew the number of robots in operation each day by 85% year-over-year and 23% quarter-over-quarter.
Should investors follow Nvidia's lead?
Nvidia's stake in Serve Robotics is noteworthy, but it needs to be viewed in perspective: As of the end of the second quarter, Serve made up less than 2% of Nvidia's AI-focused portfolio. For comparison, chipmaker Arm Holdings accounted for about 82%.
With a market cap of about $422 million, Serve Robotics is barely at small-cap level and has yet to turn a profit. This makes the company's stock extremely volatile and much riskier than investing in Nvidia. There are also valuation issues, with Serve shares currently selling for 259 times forward sales. For comparison, Nvidia sells for 25 times forward sales, making it a bargain given its triple-digit growth rate.
Investors who really want shares in Serve Robotics should buy no more than a small percentage of the stock appropriate for such a risky bet. Better yet, just buy Nvidia and own Serve by proxy.
Danny Vena invests in Nvidia. The Motley Fool invests in and recommends Nvidia and Uber Technologies. The Motley Fool recommends Magna International. The Motley Fool has a disclosure policy.
