Nvidia (NVDA -0.95%) is on a shopping spree in the biotech industry. While he has no intention of developing drugs or pharmaceutical technologies for the lab, his strategy clearly requires some exposure to the sector, and when he makes a move, others tend to follow.
But how could investing in an area so far outside the traditional wheelhouse support shareholder value in the future, rather than destroy it? Let’s dive in and explore why it stakes its biotech claims.
A certain type of biotechnology is getting all the attention
Nvidia isn’t cutting deals or investing in any old biotech. His careers are biotechs using artificial intelligence (AI) as part of their drug discovery and development process. In July, the chip maker made a $50 million equity investment in the Recursive pharmaceuticalsbiotech dedicated to more effective drug development using its AI platform.
But that’s just one of an ever-growing handful of investments it’s making in the space. In 2023 alone, it invested in at least six different AI-enabled biotechs in the US and the UK. It is also pursuing a collaboration on drug development using AI with Genentech, a subsidiary of Roche.
Although the size of his investments is often not disclosed, one thing is certain. With more than $18 billion in cash, equivalents and short-term investments, Nvidia has plenty of available funds to allocate to potential drivers of its long-term growth.
At first glance, the biotech seems an odd fit for Nvidia’s traditional business model of developing and selling new chips and computing services. But in the larger context of being in the early days of the ongoing AI revolution, these plays make a lot more sense.
It is currently developing a service it calls BioNeMo, which it markets as an AI platform to accelerate drug discovery. Both Recursion Pharmaceuticals and Schrödingerwhich are already popular AI-driven drug discovery biotechs in their own right, are paid contributors contributing to the service’s capabilities.
Ultimately, BioNeMo could be the essential tool for biopharmas at the very beginning of the drug discovery process. And that would open the door to charging subscription fees, or perhaps even a small reduction in royalties, from any of the drugs commercialized using the system.
These investments will take a long time to pay off
Nvidia is currently working to develop a suite of services that would turn it into an AI foundry of sorts, where all kinds of businesses rely on it to help them build AI systems that are tailored to their specific needs. But today, despite a number of investments in biotech, revenues from all healthcare sources are negligible and well below $1 billion a year.
That makes it paltry compared to the $18 billion it brought in in the third quarter of its fiscal 2024, the most recent quarter. The segment isn’t even mentioned consistently in earnings materials or investor presentations — at least for now.
Currently, Nvidia is clearly positioning itself to profit from any breakthrough or progress made in AI for drug discovery by incorporating elements of the most promising players into its own AI platform through its investments. It can likely realize some value from the cash it has set aside if it can get more customers on board with its drug development platform.
But finding new customers will be much easier in a few years, when the biotechs contributing to the platform today get closer to commercializing the drugs they’ve made using AI, not to mention Nvidia. If regulators give these biotechs the go-ahead to sell their drugs, it will be possible to do retrospective analysis on the utility provided by AI along the way.
Once there are clear examples of success in using AI to make the drug development process faster, more reliable and cheaper, companies will flock to use its tools for their own benefit, and this could lead to more – significant revenue growth.
Will Nvidia’s revenue from biopharma services ever approach the tens of billions it makes from its other segments? Probably not. However, it is very likely that at least a few of the bets made recently will have a huge return that will increase the value of the business.
Diversifying into a new area will also provide some downside protection in case other segments struggle. And for a value stock like Nvidia, it’s always helpful to get another injection of good news to boost the hype even further.
So keep an eye out for news of more biopharma investment activity — it won’t make much of a difference today, but over the long term it’s a bullish driver for Nvidia stock.
Alex Carchidi has no position in any of the stocks mentioned. The Motley Fool has positions and recommends Nvidia. The Motley Fool recommends Roche Ag. The Motley Fool has a disclosure policy.
