Why Are Nvidia and Uber Backing This Tiny $400 Million Artificial Intelligence (AI) Company?

Nvidia (NVDA -1.81%) is the leading supplier of high-end graphics processing units (GPUs) for data centers, where they are used to power and train artificial intelligence (AI) applications. Uber Technologies (UBER 1.32%) operates the world's largest ride-hailing platform and also the Uber Eats food-delivery service.

What do these two industry leaders have in common? Uber is partnered with 14 different companies developing autonomous driving platforms as it looks forward to a shift away from human drivers in the mobility industry. Technologies like autonomous driving and robotics are powered by AI, and Nvidia has also developed its own autonomous driving platform.

That might explain why both Nvidia and Uber are supporting Serve Robotics (SERV 23.82%), a $500 million market-cap company that has developed an autonomous delivery robot. Between them, they own more than 20% of Serve's shares outstanding, suggesting that they are bullish on the company's prospects. If you're considering following them into the stock, here's what you need to know.

Delivery robots could be the future of last-mile logistics

Existing last-mile delivery solutions are rather inefficient. Platforms like Uber Eats and DoorDash rely on people who typically use cars to deliver food and other products to customers. In a presentation last month, Serve Robotics posed this thoughtful question: Why move two-pound burritos in two-ton cars?

Robots and drones might be better solutions. Serve says the cost of hardware and software associated with developing AI and autonomy is rapidly declining, so robots are becoming a more economical choice with each passing day. In fact, Serve predicts its robots will eventually be able to operate at a cost of as little as $1 per delivery once their adoption grows and the business scales up.

Serve's robots use level 4 autonomy, which means they can drive on sidewalks within designated areas with no human intervention necessary. Since early 2022, the company's robots have delivered more than 50,000 orders on behalf of more than 400 restaurants across Los Angeles, and those deliveries were made with up to 99.94% reliability. That made the robots 10 times more reliable than human drivers, according to Serve.

The company's latest Gen3 robot is its smartest and fastest so far, with a top speed of 11 miles per hour. Thanks to Nvidia's Jetson Orin technology, which includes the hardware and software necessary for advanced robotics and computer vision, Gen3 is five times more powerful than Serve's previous generation of robots. It features faster top speeds, greater range, and longer operating times -- a combination that translates into a 50% reduction in operating costs.

Under a contract with Uber, Serve is working to deploy 2,000 new robots by the end of 2025, which will let it expand into other areas of California, plus Dallas and Fort Worth in Texas. It's also a win for Uber, because if this program is successful, the company will save money by reducing its use of human delivery drivers.

Serve generates very little revenue, but it's growing rapidly

Serve generated just $221,555 in revenue during the third quarter, but that was a 254% increase from the same quarter in 2023. On the other hand, that figure was down by more than half from 2024's second quarter, when it generated $468,375 in revenue.

The reason for the decline was because Serve realized the last of its services revenue from Magna International during Q2. Magna is a $13 billion components supplier to the automotive industry, and it is Serve's manufacturing partner for the 2,000 new robots I mentioned earlier. The two companies also have a licensing deal in place under which Magna paid a fee to Serve in exchange for some technology to build robots of its own for market segments in which Serve doesn't operate.

That licensing revenue stream is now gone, leaving Serve with only its delivery revenue. And that part of the business is still in the scale-up phase. This brings me to an important point: Serve is currently losing truckloads of money.

It had $8.3 million in operating expense during Q3, most of which went toward research and development. Given its minuscule revenue, Serve's net loss came in at $8 million for the quarter, bringing its year-to-date net loss to $26.1 million.

Serve only has $50.9 million in cash on hand. That cushion will be totally wiped out in the next 18 months if the company keeps burning money at the current pace. With that said, Serve did establish a new at-the-market stock offering facility in November that will allow it to sell additional shares to raise a further $100 million. However, that would significantly dilute existing investors.

Together, Nvidia and Uber own more than 20% of Serve's outstanding shares

Serve became an independent entity in 2021 after it was spun off from Postmates, which Uber acquired. However, Uber remains Serve's largest investor with a 12% stake.

Nvidia has invested in Serve since 2022, and currently owns an 8% stake.

Uber and Nvidia could suffer the most if Serve continues to issue new shares, unless they participate in every future capital raise to protect their interests. However, that might not be the best move, given the company's current valuation.

Serve is valued at an eye-popping price-to-sales (P/S) ratio of 196 -- meaning it's six times more expensive than Nvidia.

SERV PS Ratio data by YCharts.

According to Wall Street's average forecast (provided by Yahoo), Serve could generate $13.3 million in revenue in 2025 thanks to the deployment of its 2,000 robots. Since the company is on track to deliver $1.9 million in revenue for the whole of 2024, that would amount to growth of 600%.

That estimate gives Serve stock a forward P/S ratio of 31.7, which is much more reasonable, but still expensive. In light of that, investors who want to follow Uber and Nvidia into Serve stock should only put in money they can afford to lose.

With that said, the company says its opportunity in the robot and drone delivery industry could top $450 billion by 2030. So even a small bet on Serve stock could pay off handsomely if the company is successful.