Better Artificial Intelligence (AI) Stock: Nvidia vs. Alphabet

There are two heavy hitters in the field of artificial intelligence (AI) investing Nvidia (NVDA 1.29%) and Alphabet (GOOG 0.13%) (GOOGL 0.07%). These two are leaders in different fields and are logical companies to invest in if you’re trying to take advantage of the AI ​​race.

But which of the two is the better buy? Let’s find out.

Alphabet is a much broader investment in AI

First, let’s discuss how these two handle different areas of AI.

Nvidia’s graphics processing units (GPUs) are widely used in artificial intelligence supercomputers because they have created an optimized data processing system. The explosion in demand caused by the generative race to develop AI has created unprecedented demand for its GPUs, sending Nvidia shares up a whopping 234% in 2023.

Alphabet’s AI investment case is a bit broader. Its generative AI model, Gemini AI, beats most competitors (including OpenAI’s GPT-4) in head-to-head competitions. It also has a cloud computing division that allows customers to rent computing power and data storage for many applications, including AI. Finally, the company recently announced a reorganization in its advertising department to focus on further integrating AI.

All in all, Nvidia is a one-trick pony, but the one-trick was amazing. Alphabet is a much broader investment in AI, making it a more conservative investment. There is no winner here, as the two represent different ways to invest in AI.

Call it a tie.

Nvidia is growing at unprecedented speeds

As mentioned above, demand for Nvidia GPUs has been incredible. In the third quarter of 2024 (ending October 29), its revenue grew 206% year over year to $18.1 million. It also guided $20 billion in revenue for the fourth quarter, so it wasn’t just a strong quarter.

Alphabet’s revenue growth was a respectable 11%, but it’s not even in the same world as Nvidia.

Winner: Nvidia.

Alphabet’s growth is more sustainable

One part of Nvidia’s investment case that is often overlooked is how sustainable these revenue levels are. It’s not a subscription company (for the most part); once he sells his GPUs, his customer probably won’t need to build another system for a while. This could pose a problem in the future as the demand for GPUs may (or may not) disappear.

If Nvidia’s earnings drop sharply, the stock will follow suit because its price is constant (albeit cyclical).

Alphabet’s products are primarily subscription-based or must be purchased regularly (like ads). This makes Alphabet’s profits much more consistent than Nvidia’s.

Winner: Alphabet.

Alphabet looks like a bargain

Valuing Nvidia on a price-to-earnings (P/E) basis can only be done with a caveat. It hasn’t seen its significant growth yet, so there are still a few quarters that haven’t delivered the same gains as the last few.

But if Nvidia’s sales decline after the sales boom cools, it will give investors an idea of ​​how dearly the stock will be valued.

NVDA PE Ratio data from YCharts.

Using both metrics, Nvidia is quite expensive. On the other hand, Alphabet stock is much cheaper.

GOOGL PE Ratio Chart

GOOGL PE ratio data from YCharts.

So on that basis, Alphabet looks like a much better buy.

Winner: Alphabet.

Nvidia’s growth potential is higher

Demand for Nvidia GPUs is currently voracious, but how long that demand will last is unknown. It could be two quarters, two years or two decades. As a result, the positive effect of the company is unknown.

Alphabet probably won’t grow much faster than 15% each year, but it should post revenue growth almost every quarter.

So, depending on your risk tolerance, Nvidia may be a better buy if you want absolute growth, while Alphabet is better for consistent, long-term growth.

This is another tie.

The verdict

Picking a winner here is really a matter of preference. The two stocks represent different investment philosophies. I’m more partial to Alphabet as I’d prefer slower, more assured growth than Nvidia’s boom or bust.

I’m still concerned about what will happen to Nvidia stock when the demand for AI supercomputing is satisfied, and that’s enough to keep me from investing in it (which could be a huge mistake on my part).

Suzanne Frey, CEO of Alphabet, is a member of The Motley Fool’s board of directors. Keithen Drury has positions in Alphabet. The Motley Fool has positions and recommends Alphabet and Nvidia. The Motley Fool has a disclosure policy.

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