Considering Alternatives to Nvidia: Two AI Stocks to Watch

As technology continues to evolve, some companies have managed to stay ahead of the curve. In particular, two established tech giants have shown their mettle as leaders in the age of the internet and now seem well-positioned to dominate the ongoing AI revolution.

Despite the buzz surrounding Nvidia, whose shares have skyrocketed by 2,620% over the past five years and 184% just in 2024 up to October 25, the landscape may be shifting. Nvidia is celebrated for its impressive performance in the AI hardware sector, supported by rising demand for its solutions. However, there are key reasons investors might want to look beyond Nvidia toward other robust possibilities.

Two Key Players in AI

Investors should examine two popular stocks that are deeply integrated into daily life: Alphabet and Meta Platforms. These companies have a historical reputation for pioneering internet technologies, and they are consistently making strides in the AI arena.

For instance, Alphabet has focused on AI for the past eight years, thanks to the leadership of CEO Sundar Pichai. The company boasts a strong balance sheet, featuring around $90 billion in cash and marketable securities that empower it to invest heavily in the development of AI technologies.

During its Q3 2024 earnings call, Pichai emphasized the unprecedented momentum within the company, attributing this to a committed focus on innovation and long-term investments in AI applications that benefit both consumers and partners.

Similarly, Meta Platforms is channeling significant resources into AI under the direction of founder and CEO Mark Zuckerberg. The company's AI capabilities are embedded in its social media applications, helping users with tasks from creating images to answering queries. The company envisions AI-enhanced advertising, noting that its system can even predict audience interest better than the advertisers themselves.

Compelling Characteristics of Alphabet and Meta

Aside from their engagement with AI, both Alphabet and Meta possess several attractive qualities that make them worth considering. Notably, they are dominant players in the digital advertising space, which is experiencing significant growth potential. According to Grand View Research, the digital advertising industry is expected to swell to $1.2 trillion by 2030, growing at an annual rate of 15.5% from 2023 onwards.

This favorable trend positions both companies to enjoy substantial revenue growth in the coming years. Projections indicate that Alphabet's revenue will increase at a compound annual growth rate of 11.7% from 2023 to 2026, while Meta's sales are anticipated to rise at an annualized rate of 15.6% during the same period, signaling positive outlooks.

Moreover, both companies benefit from strong network effects, enhancing their economic moats. As platforms like Google Search and YouTube expand, their value to users simultaneously increases. In the case of Meta, a larger user base leads to more content and connections, making it challenging for competitors to enter the market successfully.

Their financial strength is another highlight. Both companies produce robust cash flows combined with solid balance sheets, reducing financial risks for stakeholders.

Valuation Perspectives

Nvidia's explosive growth has resulted in high valuation ratios, with its shares trading at a forward price-to-earnings (P/E) ratio of 49.8. While some enthusiasts may argue that this valuation is warranted, it suggests a lack of margin of safety, leaving investors exposed to potential risk.

In contrast, Alphabet presents a more attractive investment opportunity, with a forward P/E ratio of 22, while Meta trades at a more reasonable 27.4. These valuations position them as more appealing options than Nvidia's currently inflated price.

For those looking to tap into the booming AI sector without following the prevailing hype around Nvidia, investing in both Alphabet and Meta Platforms offers an excellent alternative for capturing exposure to this rapid-growing trend.

AI, Investing, Stocks