Nvidia (NVDA +4.39%) is far and away the most valuable company in the world today, with a market capitalization around $4.6 trillion. It's a leader in artificial intelligence (AI) with chips that are key for many tech giants developing AI products and services, including chatbots. In the past five years, the stock has risen an incredible 1,200%.
But as well as Nvidia has done of late, I believe that another company could end up overtaking it in five years: Alphabet (GOOG 0.54%)(GOOGL 0.49%). Here's why that may happen.
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Alphabet still looks vastly underrated
Currently, Alphabet's market cap is about $3 trillion. It's one of the top companies but is well behind Nvidia, and its stock would need to rise by more than 50% to reach the same valuation. That's no small task, but I believe it is possible.
It has some phenomenal assets in YouTube and Google Search, which enable it to generate solid growth today. But in the long term, there may be even greater potential for the business to grow its top and bottom lines.
Its robotaxi business, Waymo, for instance, may be the best example. It has completed more than 10 million rides and is now in multiple key markets -- including Los Angeles, Phoenix, San Francisco, Atlanta, and Austin, Texas -- and it's expanding to even more cities. As the business gets bigger, investors may place a greater value on Alphabet.
The company also has a huge advantage in AI since it can train its models on YouTube content. The result has been a cutting-edge model called Veo 3, which can make AI videos that look as if they weren't generated by AI.
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Also, with AI integration into Google apps, a subscription to the company's AI products could be a compelling option for consumers and turn into a promising growth catalyst.
For Alphabet's stock to be trading at a price-to-earnings (P/E) multiple of just 26, which is right around the S&P 500 average, would suggest that the tech stock is undervalued given the wealth of growth potential; it should be trading at a premium. There could be a lot of upside for investors who buy the stock right now.
Nvidia could be due for a sizable drop in value
Alphabet doesn't need to soar by more than 50% to overtake Nvidia -- not if the chipmaker's stock declines, as it very well could. While Alphabet looks like it's trading at a discount, Nvidia is at a steep premium with a P/E of 54.
Investors are paying a high price for the business, but with that comes high expectations of continued strong growth and dominance in the chip sector. However, there could be trouble brewing for multiple reasons.
Rival Advanced Micro Devices has been rolling out advanced chips of its own and has partnered with OpenAI, the company behind ChatGPT. Other tech companies are also making their own chips, including Alphabet.
Given how expensive investing in these technologies has become, Nvidia may not be nearly as dominant in the future, and its market share may diminish over the next five years.
Another factor to consider is a possible slowdown in AI-related spending as a whole. Alphabet would feel the effects of that as well, but its stock would likely incur less of a sell-off than Nvidia, whose valuation is dependent on strong demand for its AI chips.
Alphabet looks to be the better stock right now
Although Nvidia is the top tech stock today, I don't think that can last over the long term. Its business depends heavily on AI and its role as the go-to chipmaker for tech companies. In the early innings when tech companies have little or no alternatives, it can dominate. Over time, however, that can change significantly, which is why I believe Nvidia's value can -- and likely will -- drop in the next five years.
Alphabet, meanwhile, has a much more diversified business model. It looks to be an underrated growth stock, and in five years, I believe, it will overtake Nvidia in valuation as these two stocks could end up going in opposite directions.
