The rise of generative artificial intelligence (AI) has ushered in a golden age for chip designers Nvidia (NASDAQ: NVDA) and its investors. Software and services veteran IBM (NYSE: IBM) also benefits from the same trend, but in a very different way.
Which of these tech titans is the best AI stock in summer 2024? Let’s take a look.
The success of Nvidia’s generative AI
Nvidia wasn’t a very exciting story before The Rise of Generative AITwo years ago, the company did its best to distance itself from cryptocurrency mining, and consumer interest in gaming hardware, spurred by the lockdown, faded. Nvidia was already shipping tons of AI accelerator chips behind the scenes, but without much publicity because no one had seen ChatGPT yet. In fact, Nvidia’s involvement in autonomous vehicle systems looked like a promising growth catalyst At the time.
Oh my God, how times have changed.
It’s common knowledge that ChatGPT’s artificial brain was built around Nvidia chips, and the company has quickly established itself as the go-to supplier of AI acceleration hardware. An Nvidia A100, H100, or L40S accelerator card costs between $8,000 and $30,000. It takes tens of thousands of these products to train a modern extended language model (LLM). These chip sales come in large, lucrative batches.
So, Nvidia’s sales jumped 262% year over year in its May first-quarter report. Data center sales, including the aforementioned AI accelerators, accounted for 87% of that revenue. That’s up from 60% in the same period last year and 45% in the year before that.
As a result, Nvidia’s earnings and cash flow are soaring. So is its stock price. Nvidia investors have seen their holdings increase tenfold from two-year lows as of October 2022.
The stock is obviously up for good reason, but the enthusiasm for AI seems a little overheated. Whether you look at price-to-sales, price-to-earnings, or price-to-free cash flow, Nvidia is trading well above its long-term valuation averages.
Long story short, Nvidia appears overvalued despite its booming financial results. I would be a buyer again if the stock suffered a dramatic decline, but I cashed out some of my Nvidia profits in the spring and it’s nothing more than a hold idea for now.
How IBM’s radical shift in strategy is paying off
Unlike Nvidia, Big Blue is no longer a hardware vendor. Its unique mainframe systems still provide some visibility into the hardware side of the tech world, but the company as a whole has refocused on software and services.
Because of its exclusive focus on enterprise customers, the market has been slow to recognize IBM’s AI insights. Enterprise customers must put their new software tools through performance, security, and integration testing, while seeking budget approval from multiple levels of management. It takes time, but the resulting deals tend to be strong and long-lasting.
This is where the company is today. Many of the testing and approval processes have run their course and IBM is…
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