Wall Street is a springboard for innovation. Since the advent of the internet 30 years ago, there has been a long list of next big trends and innovations, including genome sequencing, 3D printing, blockchain technology, and the Metaverse. a bit. But none of these trends offers the game-changing potential of artificial intelligence (AI).
With AI, companies are using software and systems to oversee tasks typically assigned to humans. Machine learning allows these systems and software to evolve over time, making them more efficient at tasks and potentially even learning new tasks. Due to the wide utility of AI, PwC researchers estimated that AI could increase global gross domestic product (GDP) by $15.7 trillion in 2030.
NVIDIA's stock price has soared thanks to AI, but it may be in a bubble
There are dozens of publicly traded companies set to benefit from the AI ​​revolution, but none have enjoyed such a direct boost. Nvidia (NASDAQ:NVDA). Nvidia's A100 and H100 graphics processing units (GPUs) have become the standard for AI-powered data centers. Nvidia has significantly ramped up production of core AI GPUs, and the company is unlikely to cede much data center market share, at least in the first half of this year.
In fiscal year 2024 (ending January 28, 2024), Nvidia's data center revenue more than tripled to $47.5 billion. Innovation has been a hot topic, but Nvidia's biggest “weapon” is its pricing power. Enterprise demand for high-performance GPUs created a glut in supply, allowing Nvidia to rapidly increase the selling price of its units.
Unfortunately, if history has anything to say about it, this fairy tale story may come to an end sooner rather than later for NVIDIA.
Over the past 30 years, there hasn't been a single next big trend that didn't involve an incipient bubble. History has shown that investors have a terrible habit of overestimating the adoption/spread of new technologies, trends, and innovations. Artificial intelligence is unlikely to be an exception to this unwritten rule.
But there is more to worry about than just historical correlation. As Nvidia ramps up production of its valuable GPUs and newly introduced Blackwell chips, it has a real chance of cannibalizing its own gross profits. GPU shortage was a core driver of data center sales growth in FY2024. As outside competitors enter the space and NVIDIA increases its own production, this shortfall will decrease, perhaps eating into some of its gross margins.
To make matters worse, Nvidia's four largest customers by revenue — microsoft, meta platform, Amazonand alphabet — Everyone is developing their own AI chips. These “Magnificent Seven” components are expected to reduce his dependence on Nvidia in the future or completely replace his in-house data center infrastructure.
All of these factors suggest that NVIDIA's stock price may be in a bubble.
Forget Nvidia: These AI stocks have never been cheaper
But this doesn't mean all artificial intelligence stocks are in a bubble or at risk of bursting, if history is anything to go by. The three AI stocks appear to be much smarter buys for investors, as they aren't cheap based on prior-year earnings and share common traits.
alibaba
The first AI stock that looks like an incredible value when placed alongside Nvidia, the infrastructure backbone of the AI ​​movement, is none other than China's leading e-commerce platform alibaba (NYSE: Baba).
Most investors are familiar with Alibaba, as it is an online retail giant that is the second largest economy in the world by GDP. The International Trade Association estimates that Taobao and Tmall will collectively control nearly 51% of China's e-commerce market share in 2023. The growth of the country's middle class suggests that e-commerce has the potential to deliver superior growth rates for years to come.
But what investors don't know about Alibaba is that its cloud infrastructure services platform, Alibaba Cloud, accounted for more than a third of China's cloud infrastructure services spending in the first quarter of 2023. is. Alibaba Cloud relies on generative AI solutions to help businesses. Build applications that can improve customer interactions. Enterprise cloud spending in China is still in its infancy.
Despite being the undisputed leader in e-commerce and cloud infrastructure services in China, Alibaba's valuation has never been this low. Even after subtracting the roughly $92 billion in cash, cash equivalents and various investments that Alibaba ended 2023 with, the company's stock trades at less than five times consensus year-over-year earnings. Even considering the regulatory risk factors associated with investing money in China, Alibaba looks like a great value.
JD.com
A second artificial intelligence stock that is historically undervalued and could be a smarter buy than Nvidia, China's second-largest e-commerce company. JD.com (NASDAQ:JD). That's right, the second Chinese stock!
As I pointed out to Alibaba, China's online retail sales are still in the early ramp-up stages, which is great news for the industry as a whole. But JD.com has advantages that could make it an even more attractive acquisition than Alibaba. While China's leading e-commerce companies rely heavily on third-party sellers, JD is primarily a direct-to-consumer (DTC) retailer. Similar to Amazon, it manages the inventory and logistics needed to get purchased products to consumers. Having more control over the DTC process should yield better margins in the long run.
Although JD.com is far from on the same level as Alibaba when it comes to AI dominance, it debuted a large-scale language model, ChatRhino, last year. His goal with ChatRhino is to help companies shorten innovation timelines and quickly solve supply chain problems across a variety of industries. ChatRhino has been in development for two years prior to its launch, and through the rest of his decade he is likely to drive JD's growth rate.
At the end of 2023, JD had a $22.7 billion treasure chest of net cash, cash equivalents, restricted cash, and various investments. JD is valued at less than eight times expected earnings, and more than half of its market capitalization is derived from its net cash balance. At its current valuation, JD stock appears to have all the risks built into it.
Baidu
At a time when Nvidia stock appears to be in a bubble, China's leading internet search engine is the third AI company to drop to an all-time low Baidu (NASDAQ:BIDU). In case you haven't noticed, the common denominator among these stocks is that they are based in the world's second-largest economy (China).
Baidu's underlying segment has long been Internet search engines. Globally, Google, an Internet search engine owned by Alphabet, is dominant, but within China Baidu is the main player. The company held a 60% share of China's internet searches as of February, and with a few exceptions, has maintained a 60% to 85% share of domestic internet searches for nine years. If a company wants to target its messages to Chinese consumers, it is likely to use Baidu.
More importantly, Baidu is also a leading player in China's rapidly growing cloud infrastructure services sector. In the quarter ended March 2023, Baidu's AI Cloud captured an 8% share of spending, ranking fourth in the country behind Alibaba Cloud, Huawei Cloud, and Huawei Cloud. tencent cloud.
Additionally, Baidu is a world leader in intelligent driving. Since its inception, subsidiary Apollo Go has completed more than 5 million autonomous drives on public roads.
After all, Baidu stock is very cheap. You can buy the stock now for about 8 times prior year earnings. But that doesn't take into account the company's more than $28 billion in net cash, cash equivalents, restricted cash, and various investments. The risk-reward profile overwhelmingly favors the upside.
Should you invest $1,000 in Nvidia right now?
Before buying Nvidia stock, consider the following:
of Motley Fool Stock Advisor Our analyst team has identified what they believe Best 10 stocks What investors can buy right now…and Nvidia wasn't among them. These 10 stocks have the potential to generate impressive returns over the next few years.
stock advisor We provide investors with an easy-to-understand blueprint for success, including guidance on portfolio construction, regular updates from analysts, and two new stocks every month.of stock advisor Since 2002, the service has more than tripled S&P 500 returns*.
See 10 stocks
*Stock Advisor returns as of March 25, 2024
John Mackey, former CEO of Amazon subsidiary Whole Foods Market, is a member of the Motley Fool's board of directors. Randi Zuckerberg is a former Facebook head of market development and spokesperson, sister of Meta Platforms CEO Mark Zuckerberg, and a member of the Motley Fool's board of directors. Alphabet executive Suzanne Frye is a member of The Motley Fool's board of directors. Sean Williams has held positions at Alphabet, Amazon, Baidu, JD.com, and Meta Platforms. The Motley Fool has positions in and recommends Alphabet, Amazon, Baidu, JD.com, Meta Platforms, Microsoft, Nvidia, and Tencent. The Motley Fool recommends his Alibaba Group and recommends the following options: A long January 2026 $395 call on Microsoft and a short January 2026 $405 call on Microsoft. The Motley Fool has a disclosure policy.
Artificial intelligence (AI) stock Nvidia may be in a bubble, but these 3 AI stocks are cheaper than ever The original article was published by The Motley Fool