Megacap technology stocks have been some of the biggest and longest-standing beneficiaries of the artificial intelligence (AI) revolution. While growth stocks in the tech sector have experienced at least some form of action since AI emerged as a megatrend, these gains have been fleeting for most companies -- leading to prolonged periods of outsize volatility.
But for big tech, the gains have been quite steady over the last couple of years. The company that has enjoyed the most upside so far is semiconductor powerhouse Nvidia, which has seen its market value rise by trillions -- making it one of the most valuable companies in the world.
While owning Nvidia stock has helped some investors realize unprecedented gains and wealth, I see a different member of the "Magnificent Seven" as the better long-term opportunity. Let's explore the dynamics between Nvidia and Amazon (AMZN +3.47%) and assess why the e-commerce and cloud computing darling could be the more valuable company by next decade.
NASDAQ: AMZN
Key Data Points
Why Amazon's growth looks poised to accelerate
Over the last two decades Amazon has extended far beyond its e-commerce marketplace. Today, the company operates across cloud computing infrastructure, advertising, streaming and entertainment, logistics, grocery delivery, subscription services, and more. By diversifying its ecosystem, Amazon has acquired a lucrative combination of retail and corporate consumers.
For a couple of years now, Amazon has quietly been pouring billions into a number of AI-related initiatives as it begins to build the next phase of its business. Some of the higher-priority moves the company has made includes investing $8 billion into a start-up called Anthropic, which has become an integral component of the company's cloud computing platform, Amazon Web Services (AWS).
Amazon has also been focusing on building AI data centers, its own line of custom silicon chipsets, and doubling down on robotics automation processes for its fulfillment centers.
AMZN Revenue (Quarterly) data by YCharts
If you look at the revenue and profit trends above, you might be questioning why Amazon is making these investments in the first place. Well, just check out the disparity between Nvidia's growth and Amazon's. It's clear that the slopes of Nvidia's revenue and profit lines are far steeper than Amazon's.
With that said, I'd caution investors against dismissing Amazon's potential. Revenue and operating profits in AWS have been accelerating considerably since the Anthropic partnership commenced a couple of years ago. In addition, Nvidia sells some of the most important pieces of hardware and software needed to develop AI. In other words, Nvidia has been enjoying faster gains compared to its peers because companies need their products. Amazon, by contrast, has spent the last two years building new products and services that have yet to fully scale.
For these reasons, I think Amazon is in the early days of a new period of exponential growth. Below, I'll detail why Nvidia may be staring at a considerable slowdown over the next several years.
Why Nvidia's growth could begin to stall
The primary tailwind fueling Nvidia's business for the last couple of years is demand for compute and networking equipment for data centers. Companies investing in AI infrastructure rely heavily on chipsets called graphics processing units (GPUs), which is a piece of hardware that Nvidia specializes in designing.
For a while, Nvidia had the luxury of virtually no direct competition. This provided the company with an enormous bargaining chip in the form of pricing power -- essentially charging a premium for its GPUs as companies all around the world lined up to buy them.
Although the launch of Nvidia's newest GPU architecture, Blackwell, is off to a strong start, I am beginning to question how much longer the company's pricing power is going to last. Advanced Micro Devices has finally launched its own line of competing GPUs, the MI300 accelerators. Although AMD's data center GPU business is much slower than that of Nvidia, it is growing at a fast clip while maintaining profitability. In addition, AMD is able to compete with Nvidia when it comes to price -- which has helped the company attract the likes of Oracle, Meta Platforms, and Microsoft as early adopters of the MI300 architecture.
Beyond direct competition, other hyperscalers such as Microsoft and Alphabet are joining Amazon in developing their custom silicon chips. With the addition of more chipsets coming to market, Nvidia faces the risk that businesses begin to see GPUs as a commoditized piece of hardware.
As a result, Nvidia may be forced to loosen its pricing structure in order to remain competitive in the GPU realm -- a dynamic that will likely begin to show some meaningful deceleration across sales and profit margins.
Image source: Getty Images.
Taking a look at valuation disparity
The chart below illustrates the price-to-earnings (P/E) ratio for Amazon and Nvidia over the last three years. It's interesting that the ongoing sell-off in the Nasdaq has converged both companies' P/E multiples to essentially the same value (hovering right around 30). In other words, although Nvidia's market cap of $2.3 trillion is much higher than Amazon's $1.8 trillion, both businesses are valued similarly on a P/E basis.
NVDA PE Ratio data by YCharts
While I do think each stock is poised for a rebound, I think investors may begin to apply some more scrutiny over Nvidia. The company has been sizzling hot for the last two years and the momentum was surely going to stall out at some point.
Now as more competition begins to enter Nvidia's core market, the company is going to have to invest in other areas of the AI landscape in order to continue winning over enthusiasm from growth investors. By contrast, Amazon has already been making a number of investments -- many of which have yet to scale and fully bear fruit.
For these reasons, I think Amazon is the better buy and hold than Nvidia right now, as I think the company is positioned to accelerate both sales and profits for years to come -- hence commanding a premium multiple over its peers down the road.
