Only two years ago, Nvidia's (NVDA -3.00%) biggest source of revenue was the sale of its graphics processing units (GPUs) to gamers, who use the chips to build high-powered gaming PCs.
However, a lot has changed for the company since the launch of ChatGPT's OpenAI last November. The tech giant's over-85% market share in GPUs saw it get a headstart in artificial intelligence (AI), becoming the primary chip supplier for countless companies.
As a result, Nvidia's stock has skyrocketed about 230% year to date alongside soaring revenue that hit new heights quarter to quarter. The company is on a promising growth path and likely has much to offer investors over the long term. But its meteoric rise has also made its stock expensive compared to those of other AI-minded companies.
So before you go filling up on Nvidia stock, here is one green flag and one red flag for the chipmaker in 2023.
Green flag: Stellar growth that has shown no signs of slowing
Nvidia posted earnings last week for its third quarter of 2024 (which ended Oct. 29), reporting revenue growth of 206% year over year as it beat analysts' expectations by more than $2 billion. Operating income rose more than 1,600%, with much of the company's growth owed to its data center business. Nvidia's data center segment grew 279%, profiting from increased chip sales.
Meanwhile, macroeconomic headwinds appear to be subsiding, as the company's gaming segment posted an 81% rise in revenue.
Every part of Nvidia's business is on a promising growth trajectory. Even gross margins are rising at an impressive rate, hitting 74% in Q3 2024, 20 points above the same metric a year ago.
Nvidia will face increased competition next year, with new product launches from Advanced Micro Devices and other chipmakers. However, Raymond James managing director Srini Pajjuri said last week, "GPU demand continues to outpace supply as Gen AI adoption broadens across industry verticals."
Pajjuri believes Nvidia will retain its over-85% market share in AI, and is not "overly concerned" about its performance in 2024.
The company's dominance will be a challenge for competitors to overcome, with Nvidia likely to see major gains from AI for years.
Red flag: There are cheaper AI stocks than Nvidia
Nvidia stock's rapid rise has been lucrative for current investors, but has also made its shares expensive for new ones. The company will likely continue expanding financially over the next year, but much of its short-term growth might already be priced into its shares.
In fact, despite delivering legendary Q3 2024 results this month, Nvidia's stock has actually fallen around 5% since its earnings release as Wall Street remains cautious about its growth potential over the next year. Consequently, those interested in investing in AI might be best off looking at cheaper options for now.
Data by YCharts
The chart above compares price-to-earnings ratios (P/E) and price-to-free cash flows of some of the biggest names in AI, including Nvidia, Amazon, Microsoft, and Alphabet. These are useful metrics in determining a stock's value, with lower figures indicating better bargains.
In both metrics, Alphabet is by far the best value, and Microsoft is a not-too-distant second. These companies have similar earnings potential in AI over the long term compared to Nvidia, with potent brands that offer countless possibilities to monetize their AI offerings.
Nvidia's stock has soared more than 1,000% in the last five years, and there's no telling how far that figure could rise over the next half-decade with the power of AI. However, prospective investors should plan to hold the chipmaker's stock for at least 10 years to ensure significant gains.
Alternatively, Alphabet or Microsoft could be excellent ways to invest in AI right now as you wait for Nvidia's stock to come down to a more attractive price point.
