3 Top Stock Picks for Long-Term Investors Outperforming Nvidia

3 Top Stock Picks for Long-Term Investors Outperforming Nvidia

Nvidia has delivered incredible performances over the past year. Since the start of 2023, it has increased by 520%. However, this is not surprising for a cyclical company like Nvidia.

Nvidia sells a product once, then must sell another to continue generating sales. This can lead to a boom or bust environment. While this has worked for many businesses for hundreds of years, it’s not as repeatable as a subscription model.

So if you’re looking for long-term stocks, consider these three stocks that are riding the same wave as Nvidia.

Subscription Businesses Are Better in the Long Run

Some of Nvidia’s biggest customers are those that own data centers used for cloud computing. Cloud computing is used by many companies who do not wish to maintain IT resources within the company. This involves leasing computing power from cloud computing providers, which converts large upfront investment costs into recurring expenses. It’s a smart solution because it preserves a company’s capital, allows it to scale easily, and avoids the risk of purchasing technology that could become obsolete in a few years.

The largest cloud computing providers are Amazon (NASDAQ:AMZN), Microsoft (NASDAQ:MSFT)And Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL)and they are massive buyers of Nvidia’s main product: graphics processing units (GPUs). Amazon, Microsoft and Alphabet are building huge data centers with computing power for their cloud computing customers. GPUs provide a lot of computing power in these data centers because they can be used to process data, run technical simulations, and train artificial intelligence (AI) models.

There has been a lot of interest in using GPUs for AI recently, as many companies race to develop and implement their AI models. This caused a surge in demand from Nvidia (for its GPUs) and cloud computing providers (their easily rentable resources). The main difference here is that Nvidia can sell its GPUs to one of the cloud computing providers or another end user, but that’s it. Amazon, Microsoft, and Alphabet charge their customers monthly fees to use their resources.

This is essential, because Nvidia must hope that demand for its products continues; otherwise, its business could collapse. While I’m not saying this will happen anytime soon for Nvidia, it has tended to find itself enveloped in various bubbles (most recently the cryptocurrency collapse of 2018 and 2021) and ending up with a vast supply of Junk GPUs. This may happen again for AI-centric GPUs, or not.

To illustrate Nvidia’s cyclical nature, take a look at this chart, which shows how much its quarterly revenue has declined from its previous peak. (Note: The final value in the chart is 0%, as they all currently have their highest quarterly revenue ever).

3 Top Stock Picks for Long-Term Investors Outperforming Nvidia

Because Nvidia is subject to waxing and waning demand, its revenue declines from its peaks are far greater than those of Amazon, Microsoft, or Alphabet.

Either way, it’s much less secure than cloud computing, which is expected to see massive growth. Grand View Research released a report that the cloud computing market size was around $484 billion in 2022. But it expects it to grow massively to $1.55 trillion by 2030. This is a growing industry, and Amazon, Microsoft, and Alphabet are all poised for it. capitalize on growth.

Still, Nvidia will benefit from building data centers to run cloud computing. But once that initial sale is made, the company will lose additional revenue.

If you’re curious about why subscriptions are better than one-time purchases, just look at the software industry.

Software companies have already converted to subscription models

Software companies realized a decade ago that locking customers into a subscription service was a much better business model. Customers face a painful choice if they break the subscription, as they will completely lose access to the software. Prior to this, customers could choose to upgrade to the latest edition of the software, which may include new features. But it wasn’t always necessary.

Now, almost all software is subscription-based, and even basic products like Microsoft’s Office suite have a subscription offering. Obviously, this business model has some advantages over a one-time sale.

Even though Nvidia is doing well, I’m more confident in Amazon, Microsoft, and Alphabet’s ability to sustain their businesses over the long term through their cloud computing segments. While not the most important part of their business, they are essential elements that will provide consistent subscription revenue.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Keithen Drury holds positions at Alphabet and Amazon. The Motley Fool holds positions and recommends Alphabet, Amazon, Microsoft and Nvidia. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.

3 Best Long-Term Stocks Than Nvidia was originally published by The Motley Fool

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