If you look up "artificial intelligence" (AI) in the dictionary, you might just see a picture of the Nvidia logo. I'm obviously kidding, but there's no denying that this business has been the clear poster child of this revolutionary technological trend.
This AI infrastructure company has been a monster winner. Shares have catapulted 2,560% higher in the past five years, crushing the broader Nasdaq Composite Index by an incredibly wide margin. This means that a $10,000 investment in September 2019 would be worth a whopping $266,000 today.
You might be discouraged if you missed out on Nvidia's run-up. But perhaps it's time to take a closer look at what I believe to be the best AI stock right now.
Nvidia's impressive run
Some investors might believe that Nvidia's huge gains are warranted. The business sells the graphics processing units (GPUs) necessary to power many AI systems. And as companies of all sizes try to position their operations to integrate AI, Nvidia has been the best beneficiary.
According to research from Mizuho Securities, Nvidia has between a 70% to 95% share of the market for chips that power AI models. Unsurprisingly, growth has been unbelievable. Revenue increased 122% from $13.5 billion in the year-ago period to $30 billion in the fiscal 2025 second quarter (ended July 28).
Nvidia is also wildly profitable, posting a 75% gross margin and 62% operating margin in the latest fiscal quarter. It's not a surprise that the market has become incredibly bullish and optimistic about Nvidia's prospects. This is now a $2.7 trillion enterprise.
But as of this writing, shares trade at a price-to-earnings (P/E) ratio of 52. This makes it the second most expensive "Magnificent Seven" stock, which isn't an attractive proposition for investors.
Alphabet's enviable position
NASDAQ: GOOGL
Key Data Points
Nvidia gets all the attention when it comes to AI stocks, but investors should look at Alphabet (GOOGL +1.28%) (GOOG +1.18%). I think it's the best AI stock to buy and hold.
Back in 2001, the business was already utilizing machine learning and AI capabilities in its powerful search engine, helping users with their spelling. And even before OpenAI's launch of ChatGPT in November 2022 kicked off the AI boom, this technology was being developed and integrated in various Alphabet products and services, like providing traffic data in Maps, making it easier to find Photos by searching what's in them, and preventing spam in Gmail.
CEO Sundar Pichai positioned the business to be "AI first" back in 2016. Nowadays, AI is undoubtedly a part of Alphabet's current DNA. To be clear, the company's first AI steps weren't the smoothest. But its Gemini AI model is working.
"All six of our products with more than 2 billion monthly users now use Gemini. This means that Google is the company that's truly bringing AI to everyone," Pichai said on the Q2 2024 earnings call.
Alphabet has unrivaled reach to continue introducing AI features to almost instant adoption. This allows for rapid feedback, which only helps to constantly improve the offerings and bolster Alphabet's competitive positioning.
And the business has virtually unlimited financial resources. It generated $54 billion of annualized free cash flow in the second quarter. And Alphabet is currently sitting on a massive net cash balance of $87.5 billion, which gives it the firepower to keep investing heavily in AI.
While Nvidia's valuation is steep, that isn't really a concern in this case. Alphabet shares trade for a reasonable P/E ratio of 23. Investors shouldn't overthink it. Alphabet has long been a dominant force in the internet age. And I see this continuing in the years ahead, particularly in a world where AI becomes more prevalent.
