Nvidia (NASDAQ: NVDA) is the leading provider of data center graphics processing units (GPUs), used to develop advanced artificial intelligence (AI) models. The company consistently grew its quarterly revenue by triple-digit percentages last year, pushing its market cap to $3.2 trillion.
Now it is spreading some of its wealth by investing in smaller companies in the AI industry. In late 2023, it bought shares in a handful of companies, including top performers Arm positions And SoundHound AI.
Nvidia also converted a promissory note to acquire 1 million shares, according to a July 18 filing with regulators Serve robotics (NASDAQ:SERV)that develops autonomous last-mile delivery solutions. It has invested a total of $12 million in Serve since 2022 and currently owns 3.7 million shares, representing about 8% of the company.
Share prices soared 225% when investors learned of Nvidia’s latest move, but have since fallen 31% from that peak. It’s a small company with a market cap of just $400 million, and it could generate a lot of profit if it continues to operate as it has. Should investors follow Nvidia’s lead and buy its stock?
Delivery robots: the future of last-mile logistics?
In an August presentation to investors, Serve Robotics asked a thoughtful question: Why are we using two-ton cars to deliver two-pound burritos? Attention is then drawn to the dangers that cars pose, both to pedestrians and to the environment.
Serve believes that robots and drones are the answer instead, as the falling costs of AI hardware and software, combined with higher wages and labor shortages, will result in attractive economics for autonomous delivery solutions. In fact, the company believes the market for robotic and drone delivery could reach $450 billion by 2030.
Operate engineered robots with Level 4 autonomy, which means they can drive on the sidewalk without human intervention using AI. The company deployed 100 of them in Los Angeles in 2022 as part of a pilot program and completed more than 50,000 deliveries for 300 different restaurants. The company says the robots had a failure rate of 0.5 per 1,000 orders, which translates to a success rate of more than 99.9%, making them 10 times more reliable than human drivers.
Serve is now working to deploy 2,000 robots by the end of 2025 Uberthe meal delivery platform Uber Eats. It will expand in Los Angeles and enter new markets including Dallas and San Diego. The new robots will be manufactured exclusively by Magna Internationalan $11.8 billion parts supplier to the automotive industry.
Under the terms of their deal, Magna Serve will also pay a licensing fee to use some of its software to create other autonomous robots outside the food delivery industry, giving the startup a new revenue stream.
Serve doesn’t generate much revenue, but it’s growing quickly
Serve only generated $207,545 in total revenue in 2023, but that was almost double what it generated in 2022.
Its growth will accelerate significantly in 2024 as it has already generated more than $1,415 million in revenue in the first two quarters. That included $1.15 million from the Magna licensing agreement and $265,086 from the food delivery business.
However, the company said the software services deal with Magna was largely completed in the second quarter, meaning it does not expect further revenue from the partnership in the upcoming third quarter. That could result in a significant decline in Serve’s overall revenue in the second half of 2024 and into 2025.
While the company is growing its core revenue from actual deliveries, this isn’t enough to offset its alarming cash burn. The company lost $18.1 million in the first six months of 2024 after spending a huge amount of money, including $12.4 million on research and development alone. That means Serve is on track to surpass its $20.7 million loss in 2023, possibly by a very wide margin.
The stock is not cheap, so investors should be careful
Serve ended the second quarter of 2024 with $28.7 million in cash. Most of that came from the $40 million capital increase in April, when the company was elevated to a US stock exchange Nasdaq stock exchange of the over-the-counter market (where many risky small-cap stocks are traded). However, the second quarter cash balance does not include another $20 million the company raised in August.
Given Serve’s $18.1 million loss in the first half of 2024, a cash balance of $48 million likely won’t last even two years unless the company dramatically cuts costs. On the plus side, Uber and Nvidia are two of Serve’s largest shareholders, so it’s possible they will step in to fund the startup as it continues to scale.
The stock’s valuation is another reason why investors should be cautious. The company is likely to generate around $1.7 million in total revenue this year – based on the $1.15 million it received from Magna, plus more than $530,000 in supply revenue if we extrapolate the first half result. Therefore, based on the current market cap of $400 million, the stock trades at a daunting price-to-sales (P/S) ratio of 226.
That makes Serve much more expensive than Nvidia, which has a P/S of 25.9 at the time of writing. Given that Nvidia is on track to achieve $125.5 billion in revenue in fiscal 2025 (ending January 31, 2025) and is highly profitable, it makes no sense for Serve stock to trade at such a high premium .
Nvidia’s interest is definitely a positive sign for the startup. But remember: the chipmaker is a $3.2 trillion giant, so it can afford to lose the $12 million it has put into Serve so far. At the current valuation I don’t think you should participate.
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Anthony Di Pizio has no positions in the stocks mentioned. The Motley Fool holds positions in and recommends Nvidia, Serve Robotics, and Uber Technologies. The Motley Fool recommends Magna International and Nasdaq. The Motley Fool has a disclosure policy.
Should you follow Nvidia in this artificial intelligence (AI) stock? was originally published by The Motley Fool
