Those who invested in Nvidia (NASDAQ:NVDA) a few years ago, they’re sitting pretty well right now. The tech giant has seen its shares soar, even more than its otherwise high-performing “Magnificent Seven” peers, thanks in part to its sales of artificial intelligence (AI) systems.
However, as is often the case with market-crushing stocks, some investors are now concerned about valuation. With a forward price/earnings ratio of around 35 — where the average S&P500 is 20 – Nvidia stock doesn’t exactly look cheap.
The premium could be justified if the chipmaker continues to deliver the type of results it has been getting recently, but for investors who want cheaper Magnificent Seven stock that can also allow them to profit from the AI boom, let’s see why. Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) is a solid option.
AI will be an important growth engine
The increase in Generative AI The leader ChatGPT initially scared Alphabet shareholders. Some considered this technology to be a Google killer. Alphabet generates most of its revenue from ads on Google. Therefore, if it loses significant market share in online search, its financial results will deteriorate significantly.
It’s a reasonable fear, but Alphabet wasn’t worried. The company has been implementing AI into its business for years, including in updates to its Google algorithms.
Alphabet quickly launched its ChatGPT competitor, Bard, which has since been renamed Gemini. Alphabet’s Gemini goes beyond text generation and extends to videos, images and computer coding. The company continues to improve Gemini and other AI models it has developed while integrating various AI capabilities across its business to make it more efficient and productive, from online search to services advertising.
The result should be stronger revenue growth and operating margins. Alphabet also offers various AI services through its cloud business, Google Cloud. As the company’s CEO Sundar Pichai said during Alphabet’s first quarter earnings conference call:
Our differentiation in the Cloud starts with our AI hypercomputer, which provides an efficient and cost-effective infrastructure for training and serving models. Today, more than 60% of Gen AI-funded startups and nearly 90% of Gen AI unicorns are Google Cloud customers.
The race to develop more sophisticated generative AI platforms should be a growth driver for Alphabet.
More reasons to buy
Alphabet’s forward price-to-earnings (P/E) ratio is slightly below 22, which is still above the S&P 500 average but well below Nvidia’s. Perhaps Alphabet’s relatively low P/E reflects the fact that it’s not growing as fast. However, the company remains strong and continues to generate strong financial results. In the first trimesterthe company’s total revenue of $80.5 billion increased 15.4% year over year.
Alphabet’s operating margin came in at 32%, higher than the 25% generated in the year-ago quarter, while its net income per share of $1.89 was 61.5% higher. Alphabet has other growth drivers…
