The Simple Reason I'm Not Worried About Nvidia's Hugging Face Acquisition

Nvidia (NASDAQ:NVDA) has delivered plenty of organic growth over its history, but acquisitions have also played a major role in its expansion from a GPU designer to a comprehensive AI platform, or factory, as CEO Jensen Huang calls it.

For example, it acquired the data center networking specialist Mellanox for $6.9 billion in 2019, and it now anchors a business that generates more than $31 billion in revenue annually.

The Hugging Face acquisition, which it announced last week, will be its biggest ever at a purchase price of $12.9 billion. Nvidia did spend $20 billion in a deal with Groq, but that was a non-exclusive technology licensing and talent agreement, rather than an outright acquisition.

Acquisitions have been hit-or-miss in the tech sector, and $12.9 billion is a large sum even by modern standards. Let's take a look at what Nvidia gets for that money, before discussing what the deal means for investors.

Image source: Nvidia.

What Hugging Face brings to Nvidia

Hugging Face is an online platform for building AI and machine learning tools, and is sometimes described as "GitHub for machine learning," referring to the code repository now owned by Microsoft.

Given its position at the top of the funnel in the AI stack, you can see how the platform would be valuable to Nvidia, whose future depends on its ability to continue to dominate the AI chip ecosystem.

Hugging Face has a base of 18 million developers, researchers, and creators on the platform, and more than 3 million models, 500,000 data sets, and 1 million applications. It's currently used by more than 200,000 companies for AI development.

Hugging Face will remain an open platform, and Nvidia has been committed to open models for years. The acquisition seems to be more about gaining a valuable top-of-the-funnel platform than integrating Hugging Face's infrastructure into Nvidia, though Nvidia is the largest contributor of open models and data to Hugging Face. Still, Nvidia's ownership of Hugging Face should increase its influence over the software layer that gets built on its hardware. Open-source model adoption also drives demand for Nvidia's hardware, so supporting Hugging Face can help grow the platform and increase demand for its chips and hardware.

Why I'm not worried about the Hugging Face deal

Plenty of tech acquisitions have blown up in the past. Microsoft, for example, has a long history of botched acquisitions, including Nokia’s handset business, Skype, the videoconferencing platform, and aQuantive, a digital marketing company.

Nvidia, on the other hand, has a more successful acquisition history, and it's stuck to its strengths in semiconductors, rather than chasing every emerging business as tech giants like Microsoft sometimes have.

However, there's a simpler reason why the Hugging Face acquisition shouldn't faze investors. While the $12.9 billion is nominally a lot of money, for a company like Nvidia, it's actually quite affordable. Based on Nvidia's net income of $59.7 billion in the second quarter, Hugging Face costs it roughly three weeks of profits, and its profits are growing rapidly.

Companies can spend their profits on a few different things. Generally, the available options are capital expenditures to invest in growth, acquisitions, investments, debt repurchases, dividends, or share buybacks.

At this point, Nvidia seems to be growing too quickly, and the stock is too expensive for the company to be spending a substantial percentage of its profits on returning capital to shareholders through dividends or buybacks.

I'd rather the company use that money to invest in its growth and widen its economic moat in AI chips, and it seems to be doing that. In addition to the Hugging Face acquisition, it's built a broad network of investments and partnerships with AI labs, neocloud companies, other chipmakers, and partners like Space Exploration Technologies. Its portfolio of publicly traded companies was worth $63.4 billion at the end of Q2, and that doesn't include investments in companies like OpenAI and Anthropic.

Investors should hope to see more such acquisitions like Hugging Face as the company has more than enough capital to spend on them, and doing so will help further entrench and expand its AI empire.

Jeremy Bowman has positions in Nvidia. The Motley Fool has positions in and recommends Microsoft and Nvidia. The Motley Fool has a disclosure policy.