Artificial intelligence (AI) stocks can be exciting investments to hold in your portfolio, for the monstrous upside potential they possess. AI can help transform, simplify, and even automate tasks entirely. It can enable companies to do much more with less. Thus, businesses involved in AI, such as Palantir Technologies, Meta Platforms, and, of course, Nvidia (NVDA +1.32%), have been popular options for AI investors looking to benefit from their future growth.
AI investors recently got some great news from Nvidia CEO Jensen Huang, who said on the company's earnings call last week that "tokens are now profitable." Tokens are used in AI models, and a big concern for investors has been whether the payoff from AI will come or whether it will just be a big money pit. According to Huang, however, AI has advanced and is now more efficient.
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Nvidia's customers are getting more bang for their buck
Not only are tokens more efficient, but Nvidia's chips are also proving to be more valuable than previously expected, with the company's CFO, Colette Kress, saying that "customers are generating profitable revenue beyond the depreciable life of their GPUs." This can inspire customers to spend even more on Nvidia's high-end chips, knowing that they may lead to better returns and improved profitability for their businesses.
This is a win-win for both Nvidia and its customers. On the one hand, it can lead to more demand for Nvidia's chips, while on the other, it can result in increased productivity and profitability for its customers. Thus, Nvidia and tech companies using its chips may both be able to benefit from these developments.
NASDAQ: NVDA
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Why investors should still tread cautiously with AI stocks
If businesses are able to do more with tokens, that means investors should expect better financial results from AI companies. But that doesn't mean that AI stocks may soar on these developments. Many of them trade at inflated valuations, and improved financial numbers may simply be necessary to justify their current valuations.
While better earnings prospects are good news for companies involved in AI as a whole, that doesn't mean every single AI stock has become a better buy in the process. As always, investors should consider valuations when picking individual stocks.
Nvidia's stock, which trades at 25 times its estimated future profits, is more reasonably priced than other AI stocks, and it can be one of the safer options to hold for the long term. But its valuation is still a bit elevated, and thus, its returns may not be as strong as they have been in recent years.
