According to a recent regulatory filing, chipmaker Nvidia (NVDA 2.06%) now owns a stake in Nano-X Imaging (NNOX -0.68%), a small Israeli medical device company that makes X-ray machines. While the investment was modest, that didn’t prevent investors from reacting ebulliently to the news — Nano-X’s shares skyrocketed more than 50% the following day.
Does Nvidia’s involvement have the potential to be transformative for the smaller business, and is it possible that there’s more upside in store for shareholders? Or is the market missing something?
A collaboration could be big, if it actually exists
It’s worth noting that Nvidia’s shares of Nano-X are worth a grand total of $379,856, which is just a smidgen in comparison to its market cap of around $572 million. So at first glance, it looks like the market is massively overreacting since it’s difficult to imagine precisely what the company could even do with such a small investment. Still, appreciating the context is key to understanding why the market isn’t entirely over the top with its aggressive bidding.
In case you aren’t familiar, Nano-X’s business model is a bit unique. Rather than manufacture its low-cost X-ray machines and sell them to customers, it doles out hardware with the goal of capturing revenue each time a customer performs a scan. In the U.S., each scan costs on the order of $30, but it’s likely cheaper elsewhere. The company has also decided to experiment with its model somewhat in the U.S., where it charges customers a small amount for equipment and installation as well as for scans.
The advantage of this model is that the business can access a much larger market — many healthcare systems in developing countries and rural areas of the U.S. could certainly make use of an X-ray machine, but they often lack the capital to buy them.
Recognizing that its target customers are unlikely to have many spare radiologists if they don’t already have basic imaging technology on hand, the company is also developing artificial intelligence (AI) systems and human-provided teleradiology services to remotely analyze the images generated by its hardware.
That could be one explanation for Nvidia’s interest as the company is keen to invest in many different AI applications. Pairing Nvidia’s acumen with AI together with Nano-X’s widely distributed scanning hardware — if that’s what the two companies have in mind — could thus be beneficial for both organizations, especially if it allows Nano-X to one day offer a product that eliminates the need for radiologists entirely. Neither company has made any comment.
In 2017, Nvidia invested in another Israeli company, Zebra Medical, which was focused on using AI for interpreting scan imagery. Then in 2021, Nano-X purchased Zebra Medical using its stock, so Nvidia received its shares. It’s very possible that the only reason it reported its stake in February was that the size of its investment portfolio grew to be worth more than $100 million, which is the cutoff after which it’d be required to make a regulatory filing.
Consider circling back in a few quarters
Nvidia is a powerful company, but it isn’t yet a kingmaker, at least not in the medical device industry. It’s true that Nano-X could stand to increase the size of its addressable market by bolstering its offerings with Nvidia’s AI capabilities if that were to take place. But that elides a more significant issue for investors, namely that Nano-X has not proven its business model is actually viable.
While the Nanox.Arc, its x-ray platform, is approved by the Food and Drug Administration (FDA), its commercial global launch has been much slower than anticipated. According to the Q3 report, its quarterly revenue of $2.5 million in 2023 was barely higher than 2022’s haul of $2.4 million in the same quarter.
What’s more, $2.2 million of its third-quarter revenue was from its teleradiology services, as was all of its revenue a year prior. Only $99,000 was derived from equipment sales and installation fees. Likewise, while its AI solution for analyzing scans of people’s livers has the stamp of regulatory approval, it has not driven faster revenue growth yet either.
In other words, this business is not yet profitable or self-sustaining, and so it is a risky investment. Without the core economic proposition validated — that it can make more money on scans than it costs to produce and install the scanning hardware — it’s hard to be enthusiastic about investing.
Nonetheless, if over the next few quarters Nano-X’s scan revenue growth starts to accelerate sharply — and there is a good chance it will based on its growing sales force and recent agreements with medical device makers — shareholders who started a position will probably get wealthier.