Nvidia’s stock has soared 2,620% in the last five years and gained 184% in just 2024 (as of October 25). Nvidia, a leading maker of artificial intelligence (AI) hardware, is experiencing this growth due to soaring demand for its products and services.
The company deserves recognition for its commanding presence in the AI infrastructure market, and the rapid rise in share prices speaks volumes.
However, some analysts argue that investors may want to consider other options instead of Nvidia. I recommend looking at two alternative AI stocks.
Two Major Players in AI
Investors should explore two well-known companies that provide daily products and services: Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG) and Meta Platforms (NASDAQ: META). These firms have been dominant in the digital landscape and are well-positioned for success in the AI industry.
Sundar Pichai, CEO of Alphabet, redirected the company’s mission to focus on AI eight years ago. Thanks to a robust balance sheet, with around $90 billion in cash and marketable securities, Alphabet has the resources to invest aggressively in technological infrastructure to support its AI goals.
“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 stated in the Q3 2024 earnings report.
Similarly, Meta, led by its founder and CEO, Mark Zuckerberg, is heavily invested in AI. This technology enhances various features within its social media applications, empowering users to create content and receive answers to queries.
Zuckerberg has indicated that AI may significantly improve the company’s advertising capabilities, stating, “Eventually, our ad system could better predict user interest than the advertisers could themselves,” during the Q2 2024 earnings call. To back its AI initiatives, Meta plans to spend up to $40 billion in capital expenditures this year.
The Many Advantages of Alphabet and Meta
In addition to their AI advancements, Alphabet and Meta have other appealing qualities for investors. Notably, both companies lead the digital advertising sector, an area experiencing significant growth. Grand View Research projects this industry will be worth $1.2 trillion by 2030, growing at an annual rate of 15.5% from 2023 through the end of the decade.
This positive outlook implies that Alphabet and Meta could see substantial revenue increases in the coming years. Forecasts suggest that from 2023 to 2026, Alphabet’s revenue will grow at an annual compound rate of 11.7%, while Meta’s is expected to rise by 15.6% annually. Such predictions are certainly promising.
Furthermore, both companies benefit from strong network effects, which enhance their competitive advantages. Google Search and YouTube gain more value as their user bases expand, a principle that also applies to Meta, where an increase in users leads to more content and connections. This dynamic makes it challenging for competitors to establish services that achieve widespread acceptance, reducing the risk of market disruption.
Lastly, it is important to highlight the solid financial health of both companies. Each generates substantial cash flow and maintains strong balance sheets, which lowers financial risk for investors.
Evaluating Stock Valuations
Nvidia’s rapid growth has resulted in a high valuation. Currently, its shares trade at a forward price-to-earnings (P/E) ratio of 49.8.
While some supporters may argue this valuation is justifiable, it reflects an overly optimistic market outlook. As a result, Nvidia appears to lack a margin of safety in its pricing.
Consequently, valuation should play a critical role in any investment strategy. In contrast, Alphabet offers a more attractive forward P/E ratio of 22, while Meta’s ratio stands at 27.4. These values are considerably more reasonable compared to Nvidia’s pricing.
For those interested in AI investment, considering shares of both Alphabet and Meta is a practical move.
Discover a New Investment Opportunity
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*Stock Advisor returns as of October 28, 2024
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Meta Platforms, and Nvidia. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
