Wall Street is a stomping ground for innovation. Since the advent of the internet three decades ago, there have been a long list of next-big-thing trends and innovations that have come down the line, including genome decoding, 3D printing, blockchain technology, and the metaverse, just to name a few. However, none of these trends offers the game-changing potential that artificial intelligence (AI) has brought to the table.
With AI, businesses are using software and systems to oversee tasks that would normally be assigned to humans. Machine learning gives these systems and software the ability to evolve over time and become more effective at their tasks, as well as potentially learn new tasks. The broad-ranging utility of AI is what compelled the researchers at PwC to estimate that it could add $15.7 trillion to global gross domestic product (GDP) in 2030.
Image source: Getty Images.
Nvidia stock has soared, thanks to AI, but may be in a bubble
Though there are dozens of publicly traded companies set to benefit from the AI revolution, none have enjoyed a more direct boost than Nvidia (NVDA 4.43%). Nvidia's A100 and H100 graphics processing units (GPUs) have become the standard in AI-accelerated data centers. With Nvidia meaningfully increasing production of its core AI-GPUs, it's unlikely the company will cede much in the way of data center market share -- at least in the first-half of the year.
In fiscal 2024 (ended Jan. 28, 2024), Nvidia's data center sales more than tripled to $47.5 billion. While innovation did the talking, Nvidia's biggest "weapon" has been its pricing power. Enterprise demand for high-powered GPUs has swamped supply, which has allowed Nvidia to rapidly increase the selling price of its units.
Unfortunately, this fairy tale story for Nvidia may come to an end sooner than later if history has anything to say about it.
NASDAQ: NVDA
Key Data Points
Over the past 30 years, there hasn't been a single next-big-thing trend that didn't involve an early stage bubble. History has shown that investors have a terrible habit of overestimating the adoption/uptake of a new technology, trend, or innovation. Artificial intelligence is unlikely to be the exception to this unwritten rule.
But there's more to be concerned about than just historic correlations. There's the real potential for Nvidia to cannibalize its own gross margin as it expands production of its prized GPUs and newly introduced Blackwell chip. GPU scarcity was the core driver of data center sales growth in fiscal 2024. As external competitors enter the space and Nvidia ups its own output, this scarcity will dwindle and, more than likely, erode some of its gross margin.
Worse yet, Nvidia's four largest customers by sales -- Microsoft, Meta Platforms, Amazon, and Alphabet -- are all developing AI chips of their own. These "Magnificent Seven" components are either going to lessen their reliance on Nvidia in future years or entirely replace its infrastructure in in-house data centers.
All of these factors suggest that Nvidia's stock may be in a bubble.
Forget Nvidia: These AI stocks have never been cheaper
But this doesn't mean all artificial intelligence stocks are in a bubble or at risk of a collapse if history rhymes, once more. Three AI stocks, which have never been cheaper on the basis of forward-year earnings and share a common trait, appear to be much smarter buys for investors.
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Alibaba
The first AI stock that looks like a phenomenal value when placed side-by-side with the infrastructure backbone of the AI movement, Nvidia, is none other than China's leading e-commerce platform Alibaba (BABA +1.11%).
Most investors are familiar with Alibaba because it's an online retail juggernaut in the world's No. 2 economy by GDP. Estimates from the International Trade Association in 2023 pegged Taobao and Tmall as controlling close to 51% of China's e-commerce market share, on a combined basis. The country's burgeoning middle class suggests e-commerce can provide superior growth rates for years to come.
But what investors might not know about Alibaba is that its cloud infrastructure service platform, Alibaba Cloud, accounted for more than a third of China's cloud infrastructure service spend during the first quarter of 2023. Alibaba Cloud is leaning on generative AI solutions to assist businesses in building applications that can improve customer interactions. Enterprise cloud spending in China is still in its very early innings.
Despite being the undisputed e-commerce and cloud infrastructure service leader in China, Alibaba's valuation has never been this cheap. Backing out the roughly $92 billion in cash, cash equivalents, and various investments Alibaba closed out 2023 with, shares of the company are trading at less than 5 times consensus forward-year earnings. Even factoring in the regulatory risk factors that come with putting your money to work in China, Alibaba looks like a screaming bargain.
NASDAQ: JD
Key Data Points
JD.com
A second artificial intelligence stock that's historically cheap and would make for a smarter buy than Nvidia is China's No. 2 e-commerce player, JD.com (JD +2.10%). That's right, a second China stock!
As I pointed out with Alibaba, online retail sales in China are still early in their ramp phase, which is fantastic news for the entire industry. But JD.com holds an advantage that might make it an even more attractive buy than Alibaba. Whereas China's leading e-commerce company relies heavily on third-party sellers, JD is predominantly a direct-to-consumer (DTC) retailer. Like Amazon, it controls the inventory and logistics required to get purchased products to consumers. Having more control over the DTC process should lead to superior margins over the long run.
While JD.com isn't anywhere near close to the same level as Alibaba when it comes to AI dominance, it did debut large language model ChatRhino last year. The goal for JD with ChatRhino is to help businesses shorten innovation timelines and quickly resolve supply chain issues across a variety of industries. ChatRhino was in development two years prior to its launch and has the potential to lift JD's growth rate throughout the remainder of the decade.
As of the end of 2023, JD was sitting on a treasure chest of $22.7 billion in net cash, cash equivalents, restricted cash, and various investments. JD is valued at less than 8 times forward earnings, and more than half of its market cap is derived from its net cash balance. All risk appears to be baked into JD's stock at its current valuation.
NASDAQ: BIDU
Key Data Points
Baidu
The third AI company that's never been cheaper at a time when Nvidia stock appears to be in a bubble is China's leading internet search engine Baidu (BIDU +4.61%). In case you haven't noticed, the trait these stocks all share is that they're based in the world's No. 2 economy (China).
Baidu's foundational segment has long been its internet search engine. Although Alphabet's internet search engine Google dominates globally, Baidu is the kingpin within China. It held a 60% share of internet search in China in February, and has, with few exceptions, sustained a 60% to 85% share of domestic internet search dating back nine years. If businesses want to target Chinese consumers with their message(s), there's a high probability they're going to use Baidu.
More importantly, Baidu is also a key player in China's rapidly growing cloud infrastructure service arena. During the March-ended quarter in 2023, Baidu's AI Cloud had grabbed an 8% share of spending, which ranked fourth in the country behind Alibaba Cloud, Huawei Cloud, and Tencent Cloud.
Further, Baidu is the worldwide leader in intelligent driving. Subsidiary Apollo Go has completed more than 5 million autonomous rides on public roads since its inception.
Rounding things out, Baidu stock is dirt cheap. Shares can be purchased right now for about 8 times forward-year earnings. But this doesn't factor in the company's more than $28 billion in net cash, cash equivalents, restricted cash, and various investments. The risk-versus-reward profile overwhelmingly favors upside.
