Nvidia (NASDAQ: NVDA) has undoubtedly been the star player in the AI game, boasting an impressive track record of innovation. In a recent move that turned heads on Wall Street, Nvidia unveiled its initial 13F filing with the SEC, showcasing a foray into multiple AI stocks that caught the attention of astute investors. This filing was triggered by the cumulative value of these investments crossing the $100 million mark for the quarter ended Dec. 31, marking a significant milestone for the tech giant.

With Nvidia’s renowned expertise in the realm of AI, it’s only natural that market watchers are eager to dissect the stocks that constitute Nvidia’s own AI investment portfolio. Here’s a succinct breakdown of the five chosen stocks, with one standout star that has managed to secure the lion’s share of Nvidia’s investment.

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A Diverse Selection

• Nano-X Imaging has pioneered a cost-effective X-ray technology integrated with AI for enhanced diagnostic accuracy. This constitutes Nvidia’s smallest investment valued at $553,000.
• TuSimple Holdings introduced a self-driving semi-truck for freight transportation, although it has since gone private following its delisting. This stands as Nvidia’s second smallest investment, valued at nearly $1.7 million.
• SoundHound AI specializes in AI solutions for conversational and voice recognition within the automotive and culinary sectors. This investment is currently valued at approximately $10 million.
• Recursion Pharmaceuticals uses AI in its biotech endeavors to propel drug discovery efforts. This emerges as Nvidia’s second-largest investment, totaling around $81 million.

The Titan of the Portfolio

The spotlight, however, falls on the final stock in the lineup, none other than Arm Holdings (NASDAQ: ARM). Nvidia’s stake in Arm Holdings currently stands tall at $253 million — surpassing the sum total of all other investments combined. This resounding endorsement illuminates Nvidia’s unwavering confidence in the trajectory of Arm Holdings.

Recall, if you will, that in late 2020, Nvidia made headlines with a bold $40 billion bid to acquire Arm Holdings; however, regulatory hurdles in 2022 thwarted this grand plan. Post-acquisition fallout, Arm Holdings went public in September 2023, with Nvidia already expressing keen interest in acquiring shares even before the IPO took place.

What sets Arm Holdings apart as a coveted asset for Nvidia? The company’s deep-rooted connections to technology and AI serve as the primary allure. Arm’s processor designs feature prominently in virtually every smartphone globally and are a staple in an array of devices, including tablets and smart TVs, underscoring its widespread influence.

From an AI perspective, Arm’s chip architectures form the backbone of hyperscale computing, cloud services, and data centers — pivotal arenas for AI computations. Arm-designed central processing units (CPUs) are instrumental components in AI systems. For instance, Nvidia’s cutting-edge Grace Blackwell GB200 Superchip houses 36 Grace CPUs, with each embedded with 72 Arm version 9 (v9) cores, signifying a powerhouse of computational prowess in a single package. Arm’s CEO, Rene Haas, highlighted that the v9 delivers superior processing strength compared to its forerunner, along with a doubled royalty rate, translating to double the earnings per unit utilized.

A Dominant Force in AI

Analysts parsing through the figures can discern the swift rise of Arm Holdings. In its fiscal Q3 of 2024, Arm reported record-breaking revenues of $824 million, depicting a 14% increase year-over-year, propelling adjusted earnings per share (EPS) by 32% to $0.29. Yet, this snapshot tells just a fraction of Arm’s success story.

Arm’s remaining performance obligation (RPO), encompassing pending revenue yet to be recognized, serves as a forward-looking gauge signaling promising times ahead. In the third quarter, RPO surged to $2.43 billion, marking a 38% uptick from the previous year.

Projections indicate a continued growth trajectory for Arm. Anticipating the fourth quarter, Arm forecasts revenues ranging between $850 million and $900 million, foreseeing a robust growth span between 34% to 42%, effortlessly outstripping the third quarter’s 14% growth.

Amidst discussions of valuation, some context is indispensable. Presently, Arm is priced at 1,700 times earnings and 45 times sales. While such valuations might appear mind-bogglingly high, they neglect to factor in Arm’s anticipated growth rate. In terms of Arm’s forward price/earnings-to-growth (PEG) ratio, the stock is positioned below 1, the benchmark for an undervalued stock. This disparity hints at the burgeoning potential of the AI domain for Arm Holdings. Bearing an established track record in the tech landscape, Nvidia’s attraction towards Arm Holdings, manifesting through both acquisition pursuits and significant investment stakes, doesn’t land as a shocker.

Would investing $1,000 in Arm Holdings be prudent at this juncture?

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Danny Vena holds positions in Nvidia. The Motley Fool has stakes in and endorses Nvidia. The Motley Fool adheres to a disclosure policy.

The sentiments expressed herein are the author’s individual viewpoints and do not necessarily mirror those of Nasdaq, Inc.