Semiconductor stocks have experienced a significant surge in demand and value ever since the launch of ChatGPT, a generative artificial intelligence (AI) application, in late 2022. This has resulted in a hot market for cutting-edge graphics processing units (GPUs) that can handle accelerated AI applications. As the leader in this sector, Nvidia’s sales and stock price have skyrocketed.
Investors who have witnessed Nvidia’s share price rise by an impressive 222% over the past 12 months may be feeling wary that the stock has become overvalued. Nvidia is set to report its fiscal fourth-quarter results on February 21, and during its third fiscal quarter, its total revenue surged by an impressive 206% year over year.
While Nvidia’s current valuation of around 97 times trailing earnings might not seem unreasonable given its current growth rate, it’s important to remember that the semiconductor industry is highly cyclical. Eventually, demand for chips that power generative AI applications is bound to decline, and the timing of this dip remains uncertain. Investing in Nvidia at its inflated valuation could lead to heavy losses if the bottom falls out in the near future.
For those who missed the boat on Nvidia, buying into the company now may present more risk than they are willing to bear. However, there is an alternative option to consider – Alphabet.
Alphabet, the parent company of Google, has been an AI-first company for several years, even before the AI gold rush began with the launch of ChatGPT. Google’s mastery of AI can be seen in its search features, where it can recognize poor spelling in queries and provide accurate search results. Google currently holds a commanding 91.5% share of the global search market, while Microsoft’s search engine, Bing, lags far behind with just 3.4%.
Google Maps is another application that heavily relies on AI. With over a billion monthly users, businesses utilize the platform to attract customers, and the AI algorithms contribute to accurate traffic forecasts and recommended routes.
In addition to its strong foothold in search and AI-powered applications, Alphabet is also a leading provider of cloud computing services. The company’s cloud business received a significant boost with the addition of Gemini, a generative AI experience similar to ChatGPT. Gemini not only caters to consumers but also allows enterprise-sized Google Cloud customers to develop their own AI applications.
Alphabet possesses several applications with over a billion active users per month, which gives the company an advantage over its competitors. Google’s extensive real-world data can be utilized by enterprise-level cloud customers, offering them insights and information they cannot find elsewhere.
While the majority of Alphabet’s revenues and profits come from its Google Services segment, its cloud business is experiencing strong growth. In the third quarter, Google Cloud sales rose by 26% year over year, and this upward trajectory is expected to continue for the next decade.
Despite its dominance in numerous markets, Alphabet is currently undervalued. Its stock can be purchased for around 21 times forward earnings expectations, making it an attractive option for investors looking to capitalize on the AI revolution with less risk.
Of course, no growth stock is entirely risk-free. However, with Alphabet’s reliable earnings from advertising and cloud services, buying the stock at a reasonable valuation presents an excellent opportunity for long-term success. Its established position in the rapidly evolving AI space also positions Alphabet as a potential top performer. Investing in Alphabet now and holding for the long run appears to be a wise move.
Suzanne Frey, an executive at Alphabet, serves as a member of The Motley Fool’s board of directors. The Motley Fool itself recommends Alphabet, Microsoft, and Nvidia, and it has positions in these companies. It also recommends caution when investing and stresses the importance of considering other options.
