In the artificial intelligence (AI) investing realm, two heavyweights are Nvidia (NVDA +2.30%) and Alphabet (GOOG +1.88%) (GOOGL +1.55%). These two are leading the charge in different areas and represent logical companies to invest in if trying to take advantage of the AI race.
But of these two, which is the better buy? Let's find out.
Alphabet is a much wider AI investment
First, let's discuss how these two tackle different areas of AI.
Nvidia's graphics processing units (GPUs) are widely used in AI supercomputers because they have created an optimized system for processing data. The demand explosion caused by the generative AI development race created unprecedented demand for its GPUs, causing Nvidia's stock to rise an incredible 234% in 2023.
NASDAQ: NVDA
Key Data Points
Alphabet's AI investment case is a bit wider. Its generative AI model, Gemini AI, beats most competitors (including OpenAI's GPT-4) in head-to-head competitions. It also has a cloud computing division, which allows clients to rent out computing power and data storage for many uses, including AI. Lastly, the company recently announced a reorganization in its advertising division to focus on further integrating AI.
Overall, Nvidia is a one-trick pony, but its one trick has been incredible. Alphabet is a much wider AI investment, making it a more conservative investment. There's no winner here, as the two represent different ways to invest in AI.
Call it a tie.
Nvidia is growing at unparalleled speeds
As mentioned above, the demand for Nvidia's GPUs has been unbelievable. In the 2024 third quarter (ending Oct. 29), its revenue rose 206% year over year to $18.1 million. It also guided for $20 billion in revenue for the fourth quarter, so this wasn't just a single quarter of strength.
Alphabet's revenue growth was respectable at 11%, but it's not even in the same world as Nvidia.
Winner: Nvidia.
Alphabet's growth is more sustainable
One part of the Nvidia investment thesis that's often overlooked is how sustainable these revenue levels are. It isn't a subscription company (for the most part); once it sells its GPUs, its client likely won't need to build another system for a while. This could create a problem in the future, as demand for GPUs might (or might not) disappear.
Should Nvidia's revenue fall off a cliff, the stock will follow suit, as it's priced like its growth is permanent (even though it's cyclical).
NASDAQ: GOOGL
Key Data Points
Alphabet's products are mostly subscription-based or must be purchased regularly (like ads). This makes Alphabet's gains much more permanent than Nviida's.
Winner: Alphabet.
Alphabet looks like a bargain
Valuing Nvidia on a trailing price-to-earnings (P/E) basis can only be done with a caveat. It hasn't lapped its substantial growth yet, so it still has a few quarters that didn't produce the same earnings as its most recent ones.
But if Nvidia's sales decline after the sales boom cools, it would give investors an idea of how expensive the stock would be valued.
NVDA PE Ratio data by YCharts.
Using either metric, Nvidia is quite expensive. On the other hand, Alphabet's stock is much cheaper.
GOOGL PE ratio data by YCharts.
So, on this basis, Alphabet looks like a much better buy.
Winner: Alphabet.
Nvidia's growth potential is higher
The demand for Nvidia's GPUs right now is insatiable, but how long that demand lasts is unknown. It could be two quarters, two years, or two decades. As a result, the company's upside is unknown.
Alphabet likely won't grow much faster than 15% each year, but it should post revenue growth nearly every quarter.
So, depending on your risk tolerance, Nvidia could be a better buy if you want absolute upside, while Alphabet is better for consistent, long-term growth.
This one is another tie.
The verdict
Choosing a winner here is really a matter of preference. The two stocks represent different investment philosophies. I'm more partial to Alphabet, as I would rather have a slower, more guaranteed upside than Nvidia's boom or bust.
I'm still concerned with what will happen with Nvidia's stock when the AI supercomputer demand is satisfied, and that is enough to keep me from investing in it (which could be a huge mistake on my part).
