Considering a Switch to This Tech Stock Over Nvidia?
Considering a Switch to This Tech Stock Over Nvidia?
The artificial intelligence (AI) revolution has propelled Nvidia's (NVDA -2.09%) shares significantly higher for the past two years. The question is, can this momentum continue, or should investors consider switching to a less expensive tech stock like Alphabet (GOOG -1.55%) (GOOGL -1.45%) instead?
Let's delve into the situation.
The Bullish Scenario for Nvidia
Following a fiscal year 2023 that concluded on January 29, 2023 (equivalent to 2022 for most companies), Nvidia's annual sales reached a staggering $27.0 billion. Two years later, the company managed to more than double this figure, reaching over $113.3 billion in revenue during the trailing 12-month period.
This period of prosperity positions Nvidia among the most valuable companies globally and highlights its exceptional profitability. As the hardware supplier behind the groundbreaking ChatGPT platform powered by AI, the company experiences heightened demand, with technology professionals eagerly seeking to build their own AI solutions.
Although Nvidia's share price may appear somewhat pricey, with a P/E ratio of 54 times adjusted earnings and sales multiple of 30 times, these metrics have previously peaked at 247 times and 46 times during the summer of 2023. Investors who bought at the top of this valuation bubble saw a 139% gain by December 26, 2024. Considering the affordability perspective, Nvidia shares appear more appealing now than ever before.
The Bullish Scenario for Alphabet
If you are impressed by Nvidia's financial results, Alphabet will leave you speechless. Over the past four quarters, Google's parent company reported a remarkable $340 billion in total revenues, converting approximately $55.8 billion into free cash flows. Even amid a two-year dip in the online advertising market, Alphabet invested a significant $49 billion in data center upgrades and infrastructure enhancements during the past year. Compared to Nvidia, Alphabet's performance is even more impressive, proving that it can weather market downturns with ease.
The stock price of Alphabet's Class A shares reflects the current ad market slump. Presently, the shares are priced at a modest 26 times earnings and 7.1 times sales.
With a myriad of reasons to buy Alphabet stock in 2024, I could drone on endlessly. Nutshell summarization: Alphabet is built for resilience in a rapidly transforming economy, thrives in the AI boom (both hardware and software), and provides investors with an optimum value proposition. What's not to love about Alphabet?
I Prefer Alphabet Over Nvidia
Although Nvidia's growth story is remarkable, it has already been priced into the stock. While potential long-term growth remains viable, the shares' valuation metrics should gradually compress. Furthermore, as numerous competitors enter the market with competing AI accelerator chips, Nvidia's market superiority may lose some steam. Although I do not recommend entirely selling your Nvidia stock, a "hold" recommendation is more appropriate at this stage.
Alphabet represents a win-win situation: an exceptional business, coupled with an incredibly affordable stock. Concurrently, the digital ad market is taking a step forward from its inflation-induced downturn, and Google's revenues are poised for growth in the upcoming years. Interestingly, market analysts have not yet fully accounted for this impending growth surge in their Alphabet valuation models.
In conclusion, while Nvidia is a sound investment for the long term, I am not in a hurry to invest more in the stock. Meanwhile, Alphabet, with its robust business and irresistible market value, remains a stock I'd gladly hold forever. If your diversified portfolio lacks Alphabet exposure, seize this opportunity to add it to your portfolio.
In the realm of finance and investing, considering Nvidia's current valuation, some analysts suggest that investors might find comparable value in a less expensive tech stock like Alphabet, given its robust performance and market resilience. For instance, Alphabet's Class A shares are offered at a relatively lower P/E ratio and sales multiple compared to Nvidia, making it an attractive prospect for some investors.