Nvidia's $12.9 Billion Hugging Face Acquisition: A Manageable Bet on AI Dominance

Nvidia's acquisition of Hugging Face for $12.9 billion is its largest-ever purchase, but it's not a cause for concern for investors.

The deal gives Nvidia access to a top-of-the-funnel platform in AI development, with over 18 million developers and researchers using the platform, more than 3 million models, and over 200,000 companies relying on Hugging Face for AI development.

Nvidia CEO Jensen Huang describes its expansion as an 'AI factory', with acquisitions like this one playing a major role in its growth. The company has a successful history of acquiring other firms, including Mellanox for $6.9 billion in 2019, which now generates over $31 billion in revenue annually.

The Hugging Face acquisition is not about integrating the platform's infrastructure into Nvidia, but rather gaining influence over the software layer that gets built on its hardware. Open-source model adoption drives demand for Nvidia's hardware, so supporting Hugging Face can increase demand for its chips and hardware.

Nvidia has a net income of $59.7 billion in the second quarter, making the acquisition roughly three weeks' worth of profits. The company is growing too quickly, and the stock is too expensive to spend substantial profits on returning capital to shareholders through dividends or buybacks.