Alphabet has huge potential in robotics and artificial intelligence.
It would have to rise more than 50% to catch up with Nvidia.
It’s also a much cheaper stock than Nvidia, which could lead to a decline.
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Nvidia (NASDAQ: NVDA) today is the most valuable company in the world with a market capitalization of about $4.6 trillion. It is a leader in artificial intelligence (AI) with chips that are critical to many tech giants developing artificial intelligence products and services, including chatbots. The stock is up an incredible 1,200% over the past five years.
However, as Nvidia has done recently, I think it may be overtaken by another company in five years: Alphabet (NASDAQ: GOOG)(NASDAQ: GOOGL). Here’s why it can happen.
Image source: Getty Images.
Alphabet currently has a market cap of around $3 trillion. It’s one of the best companies, but it’s well behind Nvidia, whose stock would need to rise more than 50% to reach the same valuation. This is no small task, but I believe it is possible.
It has some phenomenal resources on YouTube and Google search, so it can grow rapidly today. But in the long run, the business may have even greater potential to grow its top and bottom lines.
For example, its robot taxi business Waymo may be the best example. It has completed more than 10 million rides and is now in several key markets, including Los Angeles, Phoenix, San Francisco, Atlanta and Austin, Texas, and is expanding to more cities. As the business expands, investors can place a higher value on Alphabet.
The company also has a huge AI advantage by being able to train its models on YouTube content. The result was a state-of-the-art model called the Veo 3, which can create AI videos that look like they weren’t created by AI.
Additionally, the integration of AI into Google’s apps could make the company’s subscription AI products an attractive option for consumers and a viable growth catalyst.
For Alphabet stock to trade at a price-to-earnings (P/E) multiple of just 26, which is about S&P 500 medium, indicating that technology stocks are undervalued given their strong growth potential; should be traded for an additional fee. Investors who buy stocks now can benefit greatly.
Alphabet doesn’t have to rise more than 50% to overtake Nvidia — not if the chipmaker’s stock falls, as it could. While Alphabet appears to be trading at a discount, Nvidia has a premium of 54 P/E.
Investors are paying a high price for the business, but with that comes high expectations for continued strong growth and dominance in the chip sector. However, problems can occur during production for several reasons.
Rival Advanced Micro Devices released advanced chips of its own and partnered with OpenAI, ChatGPT’s company. Other tech companies are also developing their own chips, including Alphabet.
Given how expensive investments in these technologies have become, Nvidia may not be nearly as dominant in the future, and its market share may decline over the next five years.
Another factor to consider is the potential slowdown in AI-related spending. Alphabet would also feel the effects, but its stock would likely sell off less than Nvidia, whose valuation depends on strong demand for AI chips.
Even though Nvidia is the most popular part of technology today, I don’t think it can last long. Its business relies heavily on artificial intelligence and its role as a chipmaker for technology companies. At first, when tech companies have few or no alternatives, it can dominate. However, this can change significantly over time, so I think Nvidia’s value can and likely will decline over the next five years.
Meanwhile, Alphabet’s business model is much more diverse. It appears to be an undervalued growth stock and I think it will outperform Nvidia in valuation in five years as the two stocks could go in opposite directions.
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David Jagielskis has no positions in any of the mentioned shares. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet and Nvidia. The Motley Fool has a disclosure policy.
Prediction: 1 Stock to Be Worth More than Nvidia in 5 Years was originally published by The Motley Fool
