Two Artificial Intelligence (AI) Stocks Cheaper than Nvidia: Meet the “Magnificent Seven”

Two Artificial Intelligence (AI) Stocks Cheaper than Nvidia: Meet the “Magnificent Seven”

Over the past 30 years, no major trend has changed the business landscape as much as the advent of the Internet. However, the arrival of artificial intelligence (AI) the revolution can give history a run for its money.

In its simplest form, AI uses software and systems to oversee tasks that would normally be delegated to humans. The integration of machine learning, which allows software and systems to “learn” over time and become more proficient in performing their tasks, is what ultimately gives AI utility in virtually all sectors and industries.

Two Artificial Intelligence (AI) Stocks Cheaper than Nvidia: Meet the “Magnificent Seven”

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Nvidia’s stock soared thanks to the AI ​​revolution

No company has benefited more directly from the rise of AI than the semiconductor industry Nvidia (NASDAQ:NVDA). In just over a year, it has become the foundational infrastructure for high-capacity data centers. According to analysts at Citi GroupNvidia’s A100 and H100 graphics processing units (GPUs) could account for more than 90% of GPUs deployed in AI-accelerated data centers this year.

Keep in mind that Nvidia is still ramping up production. Chip manufacturing giant Semiconductor manufacturing in Taiwan is rapidly increasing its wafer-on-substrate chip capacity, which should help alleviate Nvidia’s supply chain issues and allow the company to fulfill more of its customer orders.

But when things seem too good to be true on Wall Street, they usually are.

In addition to having to face increasing external competition from companies like Advanced microsystems And Intel, Nvidia’s four largest customers, accounting for 40% of its sales, are developing their own AI GPUs to complement or replace Nvidia’s data center infrastructure. Even if Nvidia is able to maintain some degree of advantage over these in-house GPUs from its major customers, future orders from these four companies are likely to decline.

Additionally, Nvidia risks cannibalizing its own gross margin as it ramps up production. The reason data center sales more than tripled in fiscal 2024 (ended January 28, 2024) is due to the GPU shortage. Demand was so strong for its A100 and H100 chips that the company was able to significantly increase the price of these units. As Nvidia’s GPU production and that of its competitors increase, the industry-wide GPU shortage and Nvidia’s pricing power are expected to diminish.

But the most damning factor might be Nvidia’s valuation.

A magnifying glass sitting atop a financial newspaper, highlighting the phrase A magnifying glass sitting atop a financial newspaper, highlighting the phrase

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Forget Nvidia: These two “Magnificent Seven” components are considerably cheaper

There are several ways to “value” stocks. Although the traditional price-to-earnings (P/E) ratio works well for mature companies, it does not provide a particularly good valuation for the “Magnificent Seven”. The Magnificent Seven are among the largest and most influential companies on Wall Street (listed in descending order of market capitalization):

These seven companies offer well-defined competitive advantages, if not downright impenetrable moats, in their respective industries. They are also known for reinvesting their operating cash flow into high-growth initiatives. This is why cash flow tends to be the best measure of value when analyzing Nvidia and its peers within the Magnificent Seven.

As of the March 22 close, Nvidia was valued just north of 30 times Wall Street’s year-ahead cash flow estimates. This makes Nvidia the most expensive Magnificent Seven title.

The good news for investors is that two other AI-related components of the Magnificent Seven are historically inexpensive and ripe for opportunistic investors to pick up.

Alphabet

The first Magnificent Seven member offering significantly better value than Nvidia is Alphabet, the parent company of internet search engine Google and streaming platform YouTube, among other companies.

According to Wall Street’s consensus cash flow forecast, Alphabet is expected to generate more than $11 in cash flow per share in 2025. Based on its March 22 closing price, that puts Alphabet at about 13.5 times cash flow per share. cash flow for the coming year. Not only is this less than half the multiple that Nvidia trades at, but it represents a roughly 24% discount to Alphabet’s price-to-cash flow multiple over the past five years.

The operating segment that drives Alphabet is Google. In February, Google recorded a 91.6% share of global Internet searches, according to GlobalStats. It has represented at least 90% of monthly global searches for the past nine years. Being the undisputed go-to for businesses wanting to target users with their message(s), this suggests that Google should have no trouble having exceptional ad pricing power.

But it’s Alphabet’s cloud infrastructure services platform, Google Cloud, that offers the most promise in terms of cash flow growth. Google Cloud accounted for 10% of global spending on cloud infrastructure services in the quarter ended September, and this segment achieved its first year of profit in 2023.

Google Cloud is also where Alphabet has many of its artificial intelligence ties. This allows customers to use generative AI solutions to build cloud applications that can improve customer interactions and/or help businesses better target consumers with their advertising.

Enterprise cloud spending appears to be in the early stages of increasing, suggesting that double-digit sales growth may continue for the higher-margin Google Cloud.

Amazon

The other Magnificent Seven member that represents a significantly cheaper AI stock than Nvidia is none other than e-commerce titan Amazon.

Despite hitting a new 52-week high last week, Amazon ended March 22 at a multiple of just 13 times Wall Street’s estimated cash flow for the coming year. This represents a 43% reduction from its average price-to-cash flow multiple over the past five years, and is significantly lower than Nvidia’s cash flow multiple over a year ahead.

Most consumers know Amazon because of its leading online retail platform. The company’s e-commerce market accounted for nearly 38% of U.S. online retail sales last year, more than 31 percentage points higher than its nearest competitor.

But dig below the surface and you’ll find that online retail sales generate low margins and don’t contribute much to Amazon’s cash flow or operating profit. Rather, it’s the company’s ancillary operating segments, which include Amazon Web Services (AWS), subscription services, and advertising services, that do the heavy lifting.

While Google Cloud accounts for 10% of global spending on cloud infrastructure services, AWS tops the heap with a 31% share, according to estimates from technology analytics firm Canalys. Like Alphabet, Amazon deploys generative AI solutions in multiple ways within its cloud platform to allow users to create applications. On an annualized basis, AWS generates nearly $97 billion in sales and is consistently responsible for the majority of Amazon’s operating profit.

Amazon’s other ancillary segments are not left out either. Attracting more than 2 billion unique users to its website each month has boosted Amazon’s advertising sales. Likewise, it surpassed 200 million monthly Prime subscribers worldwide in April 2021 and has likely added to that total since becoming the National Football League’s exclusive streaming partner for Thursday Night Football.

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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. Citigroup is an advertising partner of The Ascent, a Motley Fool company. Randi Zuckerberg, former director of market development and spokesperson for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, 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. Sean Williams holds positions in Alphabet, Amazon, Intel and Meta Platforms. The Motley Fool holds positions and recommends Advanced Micro Devices, Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, Taiwan Semiconductor Manufacturing and Tesla. The Motley Fool recommends Intel and recommends the following options: long January 2023 $57.50 calls on Intel, long January 2025 $45 calls on Intel, long January 2026 $395 calls on Microsoft, short 405 calls $ in January 2026 on Microsoft and short $47 calls in May 2024. Intel. The Motley Fool has a disclosure policy.

Forget Nvidia: These 2 Members of the ‘Magnificent Seven’ Are Dramatically Cheaper Artificial Intelligence (AI) Stocks was originally published by The Motley Fool

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