Artificial intelligence (AI) is a disruptive technology that has reshaped multiple industries and is poised to revolutionize many more. From transportation to medicine, AI is opening up new possibilities that were previously relegated to the realm of science fiction. The proliferation of AI across almost every sector of the global economy could represent a once-in-a-lifetime opportunity for growth investors.
Adobe (ADBE -0.89%) and Nvidia (NVDA -0.29%) are two companies at the forefront of the AI revolution. Adobe is adding generative AI tools like Firefly to its content-creation software, which allows users to create and alter content based on text prompts. On the other hand, Nvidia is a top computer chip maker whose products are used in a wide variety of applications -- including autonomous vehicles, virtual computing, and cryptocurrency mining -- and are central to many AI technologies.
Image source: Getty Images.
Which of these top AI stocks is the better buy right now?
The case for Adobe
Adobe, with a market cap of around $224 billion, is still focused on growth. The large-cap tech company does not pay dividends to its shareholders at the moment. However, Adobe rewards its shareholders in other ways. For example, it bought back 7.7 million shares in its fiscal first and second quarters of 2023.
Adobe reported record Q2 revenue of $4.82 billion in June, driven in large part by its Digital Media business. This segment is projected to be a key contributor to the company's expected revenue growth in the coming years. Turning to the specifics, analysts estimate that Adobe will grow its revenue by 9.8% in 2023 and 12% in 2024.
Buying into Adobe's supercharged growth story isn't cheap, however. With a forward-looking price-to-earnings ratio of 30.6, the digital content creator's shares are considerably more expensive than its large-cap tech peers (average forward-looking P/E ratio of 17).
However, AI features like Firefly ought to drive sustainable levels of top-line growth for years to come. Firefly should help the company both retain current customers and attract new users to its suite of products by making complex editing tools like Photoshop more accessible for beginners. As a result, Adobe's stock arguably deserves its premium valuation.
The case for Nvidia
Nvidia is one of the most valuable companies in the world, with a market capitalization of over $1 trillion. The company rewards its shareholders with a modest dividend of 0.04% per year, as well as a generous stock buyback program.
In 2023, Nvidia's management is authorized to buy back $15 billion worth of its own stock. The company also has plenty of room to increase its dividend, as it only paid out 8.33% of its earnings to shareholders over the prior 12 months. However, management seems more interested in reinvesting its profits into growth.
Although Nvidia is a leader in AI, it faced some challenges in its 2024 fiscal first quarter. During the three-month period, revenue dropped by 13% relative to the same period a year ago. This double-digit revenue decline was mainly due to lower demand for its gaming and professional visualization products. On the bright side, Nvidia's revenue from its data center and automotive segments grew by a healthy 14% and 114%, respectively.
Analysts expect Nvidia to quickly bounce back from this disappointing fiscal first quarter. For the rest of its fiscal 2024, the company is projected to grow its annual revenue by a noteworthy 58.2%, and by another 27.4% in fiscal year 2025. Nvidia's exceptional growth prospects reflect the rising demand for AI-based solutions across a wide range of industries.
The downside is that Nvidia's stock price likely already reflects its impressive growth potential. The company's shares trade at a whopping 55.2 times forward earnings, which is much higher than the average of its large-cap tech peers and Adobe.
Verdict
In this head-to-head matchup, Adobe screens as the better AI play. The simple reason is that Nvidia's shares are incredibly expensive at current levels. And while Adobe's stock is far from cheap, its AI initiatives could support additional share price appreciation over the next two years. Nvidia, on the other hand, appears ripe for a pullback, based on its enormous premium.
