Whether you're a casual investor or trade professionally, you are likely aware of the bull run on Nvidia's (NVDA 6.18%) stock this year. The company has massively benefited from increased interest in artificial intelligence (AI), leading demand for its chips to soar. As a result, shares in Nvidia have skyrocketed 213% year to date.
The rally is a stark improvement to last year when the semiconductor company's stock plunged 50% over 12 months. Nvidia was hit hard by macroeconomic headwinds and subsequent declines in the PC market. However, the explosion of AI in 2023 has forced the company to reframe its business and shift focus to generative AI technology.
According to Grand View Research, the AI market is projected to expand at a compound annual growth rate of 37% through 2030. As the industry's primary chip supplier, Nvidia could have a lucrative future over the long term. However, a recent spike in its share price has made its stock an expensive option, especially compared to its competitors.
Here's why you might want to hold off on buying Nvidia's stock for now.
Excitement over AI might have hit a peak this year
Nvidia's second quarter of 2024 (ending July 2023) delivered stellar growth, proving many bullish investors right about its earnings potential in AI. The company's revenue increased 101% year over year, hitting $13.5 billion. The rise was primarily due to a 171% spike in its data center segment that significantly profited from increased demand for AI chips. And perhaps most importantly, operating income climbed over 1,000% during the quarter, earning close to $7 billion.
It was one of the best quarters in Nvidia's history and offered promising figures for where the AI market could be headed. Yet, Nvidia's stock has barely moved since posting its earnings results on Aug. 23, with its share price actually tumbling 3%.
The dip suggests excitement over Nvidia's AI potential has hit a peak for now, with its stock unlikely to move much higher for the rest of the year. Other companies may still benefit from expansions into the burgeoning sector. However, Nvidia is past profiting off of hype and now must retain its earnings momentum to deliver additional stock gains. But that could prove challenging as chipmakers like AMD and Intel gear up to challenge Nvidia's AI dominance in 2024.
Nvidia shares are expensive compared to the competition
Among AI and tech stocks in general, Nvidia has experienced the most growth this year, and by far. While its rise has been immensely beneficial to current stockholders, it has also tanked the value of its shares for new investors.
Data by YCharts.
The chart above shows how Nvidia's price-to-earnings ratio (P/E) is currently the highest among companies that are expanding into AI, making it the worst-valued stock in the industry. Looking exclusively at chipmakers, AMD's P/E of 56 and Intel's 84 are still significantly lower than Nvidia's, offering more value.
When considering price-to-free-cash-flow, another helpful metric in determining a stock's value, Nvidia's is still higher than every company in the table above except Amazon. Despite a killer financial report in its most recent quarter, Nvidia has yet to live up to its high valuation. As a result, it's probably wise to consider other investment options for now.
It might not be a chipmaker, but Microsoft's stock is one of the best AI alternatives to Nvidia. Its P/E indicates it's a significantly cheaper stock. Meanwhile, the company's earnings potential is similar to, if not greater than, Nvidia in AI over the long term. Microsoft boasts a 49% stake in ChatGPT developer OpenAI, which has given it access to some of the most advanced AI technology available. The partnership, alongside Microsoft's dominance in cloud computing and productivity software, gives it an exciting outlook in AI.
Nvidia might pay off over the very long term. However, its expensive price point and decreasing excitement from investors make its stock too big of a risk for now.
