Meet the newest artificial intelligence (AI) stock in Nvidia’s portfolio (hint: it’s not SoundHound AI)

When it comes to artificial intelligence (AI), there is Nvidia (NASDAQ: NVDA)and so is everyone else. The chipmaker has become the poster child for AI as its graphics processing units (GPUs) have become the gold standard for AI systems. So when Nvidia makes an investment in something related to artificial intelligence, investors sit up and take notice.

That’s what happened at the beginning of this year with SoundHound AI. In February, investors learned that Nvidia had taken a small position in the voice recognition and audio specialist, which sent its stock skyward, gaining as much as 93% in the week following the disclosure.

Now, history is repeating itself. Last month, Nvidia revealed that it had acquired a somewhat sizable stake Serve Robotics (NASDAQ:SERV)which sent the stock into the stratosphere. Let’s take a look at what attracted Nvidia to invest in the company and whether it makes sense for investors.

Served warm

Serve Robotics describes itself as “an autonomous sidewalk delivery company.” The company went public without much fanfare on April 18, offering 10 million shares of common stock at $4 per share. The stock initially flew under the radar and interest was thin as the stock closed its first day of trading up 22%.

The company is focusing on what management believes is a $450 billion market that uses robotics and drones for last-mile delivery. For example, the company estimates that the average grocery delivery distance in the US is 2.5 miles. It also suggests that the average cost to cover that distance using its autonomous robots would be about $1, much cheaper than existing alternatives — while reducing greenhouse gas emissions from automobiles.

Serve first rolled out its fleet of sidewalk delivery robots in Los Angeles in 2020. By the end of the year, those robots had completed more than 10,000 deliveries for grocery delivery service Postmates — now owned by Uber technologies.

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, expanding into new geographic markets starting in Q2.

Not just Nvidia

In a regulatory filing filed July 18, Nvidia disclosed that it owned more than 3.7 million shares of Serve Robotics stock, representing a 10 percent position in the company, with the stock valued at about 10 million of dollars (at that time) . Word of Nvidia’s investment sparked interest in the small company, sending shares up 335% (as of Thursday’s market close). However, several developments in recent weeks have fueled investor excitement, and it’s not just about Nvidia.

The story continues

Just this week, Serve announced a partnership with Shake Shack to deliver their food orders through Uber Eats in Los Angeles. Landing a well-known fast-casual chain like Shake Shack was a coup for Serve, raising its profile in the food delivery space.

This announcement came on the heels of Serve Robotics’ second-quarter financial results that were better than expected. The company generated $470,000 in revenue, which included $300,000 from the auto parts supplier Great to license its robotics technology. Delivery revenue of $170,000 grew 178% year-over-year and 80% sequentially. At the same time, gross margin for the segment improved 85% year over year and 64% quarter over quarter.

Contributing to the growth in financial results was a strong operational performance. The service averaged 385 daily supply hours during the quarter, up 106% year-over-year and 28% sequentially. The company also grew its daily active bots by 85% year-over-year and 23% sequentially.

Should Investors Follow Nvidia?

While Nvidia’s stake in Serve Robotics is notable, it must be put into perspective. At the end of the second quarter, Serve represented less than 2% of Nvidia’s AI-focused portfolio. For context, chip maker Arm holds constituted approximately 82%.

With a market capitalization of about $422 million, Serve Robotics is barely rising to the small-cap level and has yet to turn a profit. As such, the stock will be extremely volatile and much riskier than an investment in Nvidia. There’s also the matter of valuation, as Serve shares are currently trading at 259 times forward sales. For context, Nvidia trades at 25 times forward sales, a bargain given its triple-digit growth.

Investors who indeed Want a piece of Serve Robotics you shouldn’t buy more than a small stake befitting such a risky bet. Better yet, they can simply buy Nvidia, thereby owning the Proxy Server.

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Danny Vena has positions in Nvidia. The Motley Fool has positions in and recommends Nvidia and Uber Technologies. The Motley Fool recommends Magna International. The Motley Fool has a disclosure policy.

Meet the Newest Artificial Intelligence (AI) Stock in Nvidia’s Portfolio (Hint: It’s Not SoundHound AI) was originally published by The Motley Fool