Nvidia Just Piled $2 Billion Into This Artificial Intelligence (AI) Chip Designer. Should Investors Follow Suit?

The artificial intelligence (AI) revolution just turned three, marked by the release of ChatGPT on Nov. 30, 2022. This sparked a paradigm shift in technology and sent us hurdling toward the future. As the pioneer of the graphics processing units (GPUs) that underpin the technology, Nvidia (NASDAQ: NVDA) has become a bellwether for the AI industry. Each of the company's moves is scrutinized by investors looking for an edge.

Since the dawn of AI, Nvidia has given investors plenty to consider, investing billions of dollars into six AI-centric companies, as well as making sizable deals with several others.

Just this week, the company announced another strategic investment, this time in Synopsys (NASDAQ: SNPS), one of the leaders in chip design. Let's take a look at Nvidia's latest move and whether investors should follow suit.

Image source: Nvidia.

Strategic partnership and investment

In a joint press release that dropped on Monday, the pair announced a "multiyear collaboration" focused on expanding the reach of Nvidia's widely used Compute Unified Device Architecture (CUDA), a library of software tools designed to help developers harness the raw computational horsepower of Nvidia's GPUs. Beyond CUDA, the agreement spans agentic AI, physical AI, and Omniverse digital twins.

By combining Nvidia's AI expertise with Synopsys' "market-leading engineering solutions" and chip design know-how, the pair plan to "deliver capabilities enabling [research and development] teams to design, simulate and verify intelligent products with greater precision, speed and at lower cost."

Nvidia also announced that it has purchased more than 4.8 million shares of Synopsys common stock worth roughly $2 billion.

The details are intriguing. Synopsys will use Nvidia's CUDA libraries to accelerate its electronic design automation (EDA) -- or chip design process. This involves various steps, including designing the chip and digitally verifying that the chip's physical layout can be manufactured successfully, using "molecular simulations, electromagnetic analysis, optical simulations, and more."

The pair will also work to develop the next generation of digital twins, or virtual representations of physical objects, which facilitate development in a variety of industries, including aerospace, energy, automotive, industrial, healthcare, and -- not surprisingly -- semiconductors.

By joining forces, Nvidia and Synopsys can deliver data center and cloud-ready GPU-accelerated engineering solutions.

The big picture

As intriguing as it is that Nvidia made a sizable purchase of Synopsys stock, it's worth taking a step back and looking at the bigger picture. Since the start of 2024, Nvidia and its venture capital arm -- NVentures -- have made 117 investments worth more than $62 billion, so the $2 billion stake in Synopsys would represent roughly 3% of its AI-centric holdings.

Furthermore, in September, Nvidia announced a $100 billion partnership with OpenAI, though the funds are contingent on OpenAI building and deploying 10 gigawatts of AI data centers built on Nvidia's GPUs. This goes to show that Nvidia's investments are spread broadly across the AI ecosystem -- so its investment in Synopsys isn't the vote of confidence it might appear at first glance.

A look at the company's recent results helps add color. For its fiscal 2025 third quarter (ended July 31), Synopsys reported results that fell short of expectations, sending the stock plunging 35%. Revenue of $1.74 billion climbed 14% year over year, while earnings per share (EPS) plunged 43% to $1.51. Management attributed the shortfall to its design intellectual property (IP), as revenue from the segment declined by 8%.

Perhaps more concerning to investors was that Synopsys slashed its fourth-quarter guidance to $2.25 billion, which not only missed Wall Street's expectations but was below management's previous outlook. Expenses related to closing the Ansys acquisition and Chinese export restrictions weighed on the company's results.

Finally, there's Synopsys' lofty valuation to consider. Even after its recent fall from grace, the stock sellf for 34 times earnings, a hefty price to pay for a company facing a host of challenges and is taking "a more conservative view" for the upcoming fourth quarter.

Over the long term, Synopsys may do just fine, but after taking a step back and looking at the big picture, I certainly wouldn't buy the stock just because Nvidia did.

Danny Vena, CPA has positions in Nvidia. The Motley Fool has positions in and recommends Nvidia and Synopsys. The Motley Fool has a disclosure policy.