With the launch of the artificial intelligence (AI) chatbot ChatGPT in late 2022, generative AI has taken the tech world by storm. And major companies like Nvidia (NVDA 0.76%) and Alphabet (GOOGL 0.35%) (GOOG 0.37%) are scrambling to get a piece of the action. Let's discuss why they have what it takes to succeed.
1. Nvidia
Up 89% year to date, Nvidia is one of 2023's biggest success stories. Investors are becoming increasingly optimistic about the company's revenue potential in AI. And while the chipmaker already has a rich valuation, its hardware focus gives it a key advantage over the software-focused alternatives from an investment perspective.
OpenAI trained its ChatGPT chatbot with thousands of Nvidia's $10,000 A100 chips. And instead of letting rivals catch up to its technological lead, the company has already developed a successor called the H100, which can train AI models nine times faster and infer data 30 times faster, according to tech magazine Venture Beat.
The soaring interest in building AI platforms led to a surge in demand for these products, which can sustainably boost Nvidia's revenue and profits.
Nvidia's picks-and-shovels strategy shields it from some of the competition and uncertainty involved in building a consumer-facing AI platform to rival ChatGPT. And this likely contributes to its high valuation multiple of 60 times earnings. But you get what you pay for, and Nvidia is already a clear winner in the upcoming AI arms race.
2. Alphabet
With Alphabet up by just 16% year to date, the market might be overlooking its AI potential. Its Google chatbot Bard underwhelmed some early observers, but investors seem to be underestimating the company's long-term potential to dominate the software side of the industry.
Generative AI will disrupt Alphabet's search business because it can fulfill a similar role of answering customer queries. That said, there is no reason to believe these platforms will replace traditional search because search engines allow people to interact with the internet directly instead of having their experience filtered through a chatbot.
Image source: Getty Images.
Furthermore, as the owner of the world's two largest websites, Google and YouTube, Alphabet has access to a vast amount of data to train AI models. This will give it a rock-solid economic moat, as well as cost advantages as companies like Reddit and Twitter move to start charging fees to any AI platform that uses their data to train language models.
With a price-to-earnings (P/E) multiple of just 20, Alphabet trades at an attractive discount to the Nasdaq 100's average of 27.
Understanding the valuations
Nvidia and Alphabet are great ways for investors to bet on AI technology -- backed by the stability and diversification of blue chip companies. But they serve slightly different investment strategies. As a hardware-focused company, Nvidia will directly benefit from industry growth through its chip sales, and the meteoric rise of its stock price in 2023 reflects that.
On the other hand, Alphabet will have to struggle with rivals to capture the consumer market with its AI software. But its stock hasn't risen nearly as much this year, and the lower valuation suggests its potential success isn't already priced in, making it an arguably better buy.
