Should You Forget Nvidia and Buy This Tech Stock Instead?

Chip designer Nvidia (NASDAQ: NVDA) is a hot topic. Its 147% total return in 52 weeks is among the 10 best performances on the S&P 500 (SNPINDEX: ^GSPC) index. The company benefits greatly from the artificial intelligence (AI) boom that started in late 2022. Leading AI experts rely on Nvidia's chips to train their systems.

As a result, Nvidia sports a $3.6 trillion market value. It is the largest company in the world by some measures, and many investment pros still think it can keep climbing.

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The examples are both numerous and illustrious. A Motley Fool research report from the spring of 2024 found Nvidia in the top 10 holdings of many billionaires' hedge funds. Philippe Laffont's Coatue Management and Ken Griffin's Citadel fund held more Nvidia stock than anything else. Six months later, Ray Dalio's Bridgewater Associates and David Tepper's Appaloosa Management were buying more Nvidia stock.

Should you buy Nvidia stock, like most billionaire fund managers?

So Nvidia has its fans. You might want to follow their example and buy Nvidia stock in January 2025. After all, the generative AI craze is only getting started, and the big money will probably be made in the future. As the early king of the AI hardware hill, Nvidia is the company to beat.

Then again, the pros don't nail every call. Hitting the ball on every third swing easily qualifies you for the baseball Hall of Fame. In investing, the percentages may be higher but every genius strikes out fairly often.

And I'm not so sure about Nvidia being a buy right now. Overly enthusiastic investors seem to be counting on many years of perfect business results, baking unrealistic assumptions into the lofty stock price. Then there's the law of large numbers, which explains that it's more difficult to generate strong returns from a very large market cap.

If you want to invest in the generative AI market today, I would suggest leaving Nvidia alone. Another semiconductor company is tapping into the same resource, and its stock looks downright cheap next to Nvidia's valuation.

Micron Technology: An under-the-radar AI champion

I'm talking about memory-chip expert Micron Technology (NASDAQ: MU). The company is actually a prominent Nvidia partner, providing large amounts of high-speed memory for its AI accelerator cards. In fact, Nvidia CEO Jensen Huang recently named Micron as a key supplier of important components. That statement was enough to drive Micron's stock more than 6% higher in a single day.

But that's not an exclusive deal. The company serves a wide variety of customers, from consumers to massive enterprises, around the world. One Micron customer stood for more than 10% of the company's revenues in fiscal year 2024. Management didn't name it in business filings, but this giant client ordered memory chips in the mobile, embedded, and computer systems markets. These signs won't quite work for Nvidia, which doesn't do a lot of business in the mobile segment. Instead, they point to iPhone maker Apple (NASDAQ: AAPL) or Android owner Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL).

In other words, Micron runs a diversified business where no single customer is of game-changing importance to the company's results. At the same time, Micron records a significant sale when Nvidia finds a buyer for its high-end AI products. Why pick a winner in the AI hardware wars when you can buy stock in Micron, which partners up with pretty much everybody?

What's not to love about Micron and its stock?

I haven't even talked about Micron's modest valuation yet. The stock is changing hands at 4.2 times trailing earnings and 9.8 times next year's estimated earnings. The company recently came back from a couple of years with negative bottom-line results, due to the cyclical nature of the computer memory market and a deep downturn ultimately springing from the COVID-19 pandemic.

Micron has emerged from that crisis with a hard-to-beat portfolio of innovative memory products. It is the only memory chip maker of note that isn't based in South Korea, and the company's deeply American business model should serve it well in an era of intense international trade conflicts.

This stock holds many advantages over Nvidia's right now. It is far less expensive. It could soar on positive trends in non-AI markets such as smartphones or chip-laden modern cars. And the memory chip industry, in which Micron plays a leading role, is due for a cyclical upswing.

Four of the 16 billionaire-led funds in that research report also held plenty of Micron stock. Only time will tell which fund group made the right move, but I have high hopes for the Micron team.

Should you invest $1,000 in Micron Technology right now?

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Anders Bylund has positions in Alphabet, Micron Technology, and Nvidia. The Motley Fool has positions in and recommends Alphabet, Apple, and Nvidia. The Motley Fool has a disclosure policy.