Should You Forget Nvidia and Buy These 2 Artificial Intelligence (AI) Stocks Instead?

The Motley Fool
Updated
Mitrade
coverImg
Source: Shutterstock

With shares up 2,620% in the past five years and 184% just in 2024 (as of Oct. 25), Nvidia continues to be the talk of the town. The artificial intelligence (AI) hardware maker is benefiting from strong demand for its products and services, driving rapid growth.


Nvidia deserves credit for how it dominates the market for AI infrastructure. It's also very hard to overstate just how unbelievable the share price performance has been.


But I believe investors should forget about Nvidia. Perhaps it's a better idea to buy these two AI stocks instead.


Two leading AI enterprises


Investors need to consider two well-known stocks whose products and services they likely use daily. I'm talking about Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG) and Meta Platforms (NASDAQ: META). These companies have long been leaders in the internet age, and they're poised to be leaders in the ongoing AI race.


Alphabet CEO Sundar Pichai shifted the company's focus to being AI-first eight years ago. Thanks to a massive fortress balance sheet, with about $90 billion in total cash and marketable securities, Alphabet has virtually unlimited resources to invest aggressively in tech infrastructure to support its AI ambitions.


“The momentum across the company is extraordinary. Our commitment to innovation, as well as our long-term focus and investment in AI, are paying off with consumers and partners benefiting from our AI tools,” Pichai said in the Q3 2024 earnings report.


Meta and its founder and CEO, Mark Zuckerberg, are also intensely focused on AI. The technology is available in the company's various social media apps, allowing users to create images and get answers to questions.


The business also sees a future where AI can drastically help advertisers. "Eventually we got to the point where our ads system could better predict who would be interested than the advertisers could themselves," Zuck mentioned on the Q2 2024 earnings call. The business plans to spend up to $40 billion in capital expenditures this year to support AI ambitions.


Many positive factors


Besides riding the AI wave, Alphabet and Meta Platforms have other compelling traits that investors should pay attention to. For starters, both businesses dominate the digital advertising market, which is a powerful secular trend that has lots of growth potential. Grand View Research believes the industry will be worth a whopping $1.2 trillion in 2030, expanding at an annualized pace of 15.5% between 2023 and the end of the decade.


That favorable backdrop means that Alphabet and Meta should register notable top-line gains in the years ahead. Between 2023 and 2026, revenue at the Google parent is projected to rise at a compound annual growth rate of 11.7%, while sales at the social media giant are slated to increase at an annualized pace of 15.6%. These are certainly encouraging forecasts.


Alphabet and Meta both also possess network effects that support their economic moats. Google Search and YouTube become more valuable to their stakeholders the larger they get. The same is true with Meta, as more users results in more content and more connections being made. This setup makes it almost impossible for a rival firm to create competing services that can gain broad adoption, leading to minimal threat of disruption, in my opinion.


Lastly, I'll call out just how strong these companies' financial positions are. They both generate tremendous amounts of cash, while also having pristine balance sheets. This reduces financial risk for investors.


What about valuations?


Nvidia's monumental rise has taken its valuation to high levels. As of this writing, shares trade at a forward price-to-earnings (P/E) ratio of 49.8.


Some strong supporters might believe this valuation multiple is justified. But I think the stock is expensive due to the incredible optimism the market has toward this business. In other words, there appears to be no margin of safety embedded in Nvidia's stock right now.


Paying the right valuation should be a key part of any investor's decision-making process. Here's where Alphabet and Meta stand out. The former trades at a forward P/E ratio of 22, while the latter can be bought for a 27.4 multiple. These are much more reasonable prices to pay than what Nvidia is selling for.


Investors shouldn't overthink it: Buying shares of both Alphabet and Meta can provide adequate exposure to the AI trend.

* The content presented above, whether from a third party or not, is considered as general advice only.  This article should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments.

goTop
quote
Do you find this article useful?
Related Articles
placeholder
Intel shares surge on better-than-feared results, outlookIntel Corporation (NASDAQ:INTC) reported third-quarter 2024 financial results that exceeded analyst expectations, driving its stock up 10% in after-hours trading.
Author  Investing.com
2 hours ago
Intel Corporation (NASDAQ:INTC) reported third-quarter 2024 financial results that exceeded analyst expectations, driving its stock up 10% in after-hours trading.
placeholder
Nvidia Is Falling Today -- Is This an Opportunity to Buy the Artificial Intelligence (AI) Stock?Nvidia stock is losing ground following recent quarterly reports from Microsoft and Meta Platforms, both of which are key customers. While Microsoft and Meta Platforms each delivered quarterly sales and earnings figures that came in ahead of Wall Street's expectations, the tech giants issued forward guidance that fell short of some targets.
Author  The Motley Fool
2 hours ago
Nvidia stock is losing ground following recent quarterly reports from Microsoft and Meta Platforms, both of which are key customers. While Microsoft and Meta Platforms each delivered quarterly sales and earnings figures that came in ahead of Wall Street's expectations, the tech giants issued forward guidance that fell short of some targets.
placeholder
Amazon's Q3 earnings report beats expectations; shares gainAmazon.com Inc (NASDAQ:AMZN) reported third-quarter earnings that surpassed analyst estimates, driving its stock up 5.7% in after-hours trading despite issuing lower-than-expected guidance for the upcoming quarter.
Author  Investing.com
2 hours ago
Amazon.com Inc (NASDAQ:AMZN) reported third-quarter earnings that surpassed analyst estimates, driving its stock up 5.7% in after-hours trading despite issuing lower-than-expected guidance for the upcoming quarter.
placeholder
US stock markets take a dip as big tech AI spending worries investorsUS stock markets led by Nasdaq tumbled on Thursday after Microsoft and Meta earnings ignited investor concerns about the sector prospects amid rising AI costs. The Nasdaq Composite, which is dominated by tech stocks, saw 2.3% of its value wiped out while the Standard and Poor 500 (S&P 500) sank 1.4%. The Dow Jones Industrial […]
Author  Cryptopolitan
7 hours ago
US stock markets led by Nasdaq tumbled on Thursday after Microsoft and Meta earnings ignited investor concerns about the sector prospects amid rising AI costs. The Nasdaq Composite, which is dominated by tech stocks, saw 2.3% of its value wiped out while the Standard and Poor 500 (S&P 500) sank 1.4%. The Dow Jones Industrial […]
placeholder
Starbucks misses Q4 expectations; 'fundamental' change needed says new CEOStarbucks Corporation (NASDAQ:SBUX) reported disappointing fourth-quarter results that fell short of analyst expectations, sending shares down 1.5% in after-hours trading. The coffee giant's earnings and revenue declined as it faced challenges in customer experience and traffic.
Author  Investing.com
Oct 31, Thu
Starbucks Corporation (NASDAQ:SBUX) reported disappointing fourth-quarter results that fell short of analyst expectations, sending shares down 1.5% in after-hours trading. The coffee giant's earnings and revenue declined as it faced challenges in customer experience and traffic.