Nvidia’s Strategic Investments: Will Serve Robotics Thrive in the AI Delivery Market?

Nvidia (NASDAQ: NVDA) is the top supplier of graphics processing units (GPUs) for data centers, crucial for developing advanced artificial intelligence (AI) models. Over the past year, the company has seen its quarterly revenue grow by triple-digit percentages, raising its market capitalization to an impressive $3.2 trillion.

Recently, Nvidia has begun investing in smaller AI firms. Toward the end of 2023, it purchased shares in several companies, including industry leaders Arm Holdings and SoundHound AI.

In a regulatory filing dated July 18, Nvidia reported that it converted a promissory note to acquire 1 million shares of Serve Robotics (NASDAQ: SERV). Serve Robotics focuses on autonomous last-mile delivery solutions. Since 2022, Nvidia has invested a total of $12 million in Serve, bringing its ownership to 3.7 million shares, or about 8% of the company.

Upon learning of Nvidia’s investment, Serve’s stock surged by 225%, but it has since dropped 31% from that peak. With a market capitalization of just $400 million, some investors believe this tiny company could offer significant growth opportunities if successful. However, should other investors consider following Nvidia’s lead and buying this stock?

Image source: Getty Images.

Are Delivery Robots the Key to Last-Mile Logistics?

In a presentation to investors, Serve Robotics raised an intriguing question: Why do we use heavy cars to deliver lightweight food items? The company emphasizes the dangers that vehicles pose to pedestrians and the environment.

Serve argues that robots and drones present a safer alternative, as the decreasing costs of AI technology alongside rising wages and labor shortages create favorable conditions for autonomous deliveries. The company predicts that the market for robotic and drone delivery could exceed $450 billion by 2030.

Designed with Level 4 autonomy, Serve’s robots can drive without human guidance on sidewalks. In 2022, Serve deployed 100 robots in Los Angeles, completing over 50,000 deliveries for 300 restaurants. Impressively, these robots boasted a 99.9% success rate, with a failure rate of only half a percent per 1,000 orders, making them ten times more reliable than human drivers.

Looking ahead, Serve aims to deploy 2,000 robots by the end of 2025 on Uber‘s meal-delivery platform, Uber Eats. The company plans to expand operations in Los Angeles while also entering new markets such as Dallas and San Diego. Notably, new robots will be manufactured exclusively by Magna International, an $11.8 billion supplier to the automotive industry.

Under their agreement, Magna will also pay Serve a licensing fee to utilize its software for developing other autonomous robotic solutions outside food delivery, thus creating an additional revenue stream for Serve.

Rapid Growth Despite Limited Revenue

In 2023, Serve Robotics generated merely $207,545 in total revenue, although this reflects nearly a doubling of its earnings from the previous year.

Revenue is expected to grow substantially in 2024, with Serve already raking in over $1.415 million in the first half of the year. This amount includes $1.15 million from the Magna licensing deal and $265,086 from its food delivery services.

However, Serve’s management indicated that the software services deal with Magna would largely conclude in the second quarter, suggesting no further revenue from that partnership in the upcoming third quarter. This could lead to a notable drop in Serve’s overall revenue later in 2024 and into 2025.

While the company is experiencing growth in its core delivery revenue, it struggles with significant cash burn. In the first half of 2024 alone, Serve lost $18.1 million, primarily due to hefty spending of $12.4 million on research and development. This trajectory indicates that Serve is likely to surpass its 2023 loss of $20.7 million by a considerable margin.

Caution Advised: The Stock’s High Valuation

At the end of the second quarter in 2024, Serve held $28.7 million in cash, mainly from a $40 million equity raise in April that allowed the company to move to the Nasdaq from the over-the-counter market, where many high-risk small-cap stocks trade. On top of that, Serve raised an additional $20 million in August.

Given its $18.1 million deficit in the first half of 2024, the $48 million cash buffer is unlikely to last much beyond two years without significant cost reductions. Encouragingly, both Uber and Nvidia are major shareholders, which raises the possibility of additional financial support as Serve scales its operations.

The stock’s valuation also warrants caution. Serve is projected to generate around $1.7 million in revenue for the year, counting its earnings from Magna and estimated delivery revenue. This leads to a staggering forward price-to-sales ratio (P/S) of 226, based on its current market cap of $400 million.

For comparison, Nvidia, with a forward P/S of 25.9, is on track to generate $125.5 billion in revenue in fiscal 2025 ending January 31, 2025. It is clear that Serve’s stock trading at such a high premium to Nvidia raises questions about its valuation.

Nvidia’s investment presents a positive signal for Serve. However, it’s important to recognize that Nvidia is a colossal company worth $3.2 trillion, indicating that a loss of $12 million from its investment is manageable. At this juncture, potential investors should approach with caution.

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Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has 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.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.