Nvidia Bought Hugging Face for $12.9 Billion. This Software Acquisition Changes Everything.

Nvidia (NASDAQ: NVDA) spent about $12.9 billion recently to acquire Hugging Face. While the name tells you absolutely nothing about what Hugging Face does, I think it's a game-changing buy for Nvidia, as it marks the chipmaker's step into a different part of the artificial intelligence (AI) sector.

Nvidia investors should be thrilled with the direction this purchase will lead the company in.

Image source: Getty Images.

Hugging Face dovetails well with Nvidia's existing businesses

Hugging Face is essentially a collaborative platform and repository for hosting pre-trained AI models, datasets, and open-source machine learning libraries. Its users can test out these models in its free cloud spaces and inference environments. While it does offer some paid tiers, it's mostly a free-to-use service as of now. So, why should Nvidia investors be excited about its purchase of a company that isn't generating a ton of revenue? In this instance, the chipmaker is OK with losing money on this service -- because it will steer developers toward the Nvidia ecosystem.

If a user develops an AI model or application using Hugging Face, and then wants to take it to the next level, redoing everything on different hardware won't make a lot of sense. So if everything developed in Hugging Face's programming environment runs on Nvidia's hardware already, it would be pretty easy to recreate it on a different Nvidia-powered platform where the program could be monetizable.

This will allow Nvidia to capture more of the business of AI developers utilizing open-source AI models (versus closed-source models like those from OpenAI or Anthropic), as they will be less likely to switch hardware platforms later on in their process.

This is a genius move, and it ensures that Nvidia will also be relevant in the next phase of AI when less hardware will need to be purchased.

However, the acquisition is not a measurable needle-mover. While Nvidia may benefit over the long term by having more developers steered in the direction of its hardware, that return on investment won't be easily discernible. That may be a problem for some investors, but I think most should be OK with it. After all, Nvidia had nearly $100 billion in cash, debt securities, and equity securities on its books as of the end of its most recent quarter. Nvidia made a smart move by acquiring Hugging Face, and while it may not be an obvious needle-mover, it will help secure the tech giant's place in the future.

Keithen Drury has positions in Nvidia. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.