Wall Street is a great arena for innovation. Since the advent of the Internet three decades ago, there has been a long list of next-big-thing trends and innovations that have trickled down, including genome decoding, 3D printing, blockchain technology, and the metaverse. A few, however, none of these trends offer the game-changing potential that artificial intelligence (AI) has brought to the table.
With AI, businesses are using software and systems to oversee tasks that would normally be assigned to humans. Machine learning gives these systems and software the ability to evolve over time and become more efficient at what they do, potentially learning new tasks. AI’s broader utility has led PwC researchers to estimate that it could add $15.7 trillion to global gross domestic product (GDP) in 2030.
Nvidia stock has soared thanks to AI, but it may be in a bubble.
While dozens of publicly traded companies are poised to benefit from the AI revolution, none have received a more direct boost. Nvidia (NASDAQ: NVDA ). Nvidia’s A100 and H100 graphics processing units (GPUs) have become standard in AI-accelerated data centers. With Nvidia meaningfully ramping up production of its core AI-GPUs, it’s unlikely the company will give up much in the way of data center market share — at least in the first half of the year.
In fiscal 2024 (ending January 28, 2024), Nvidia’s data center sales more than tripled to $47.5 billion. When it comes to innovation, Nvidia’s biggest “weapon” has been its pricing power. Enterprise demand for high-powered GPUs has impacted supply, allowing Nvidia to rapidly increase the selling price of its units.
Unfortunately, this fairy tale may soon come to an end for Nvidia if history has anything to say about it.
Over the past 30 years, there hasn’t been a single Next Big Thing trend that hasn’t involved an early-stage bubble. History shows that investors have a terrible habit of embracing/overestimating a new technology, trend, or innovation. Artificial intelligence is unlikely to be an exception to this unwritten rule.
But there is more to be concerned with than just historical correlation. Nvidia has real potential to erode its gross margins as it ramps up production of its pricier GPUs and the newly introduced Blackwell chip. GPU shortages were the primary driver of data center sales growth in FY24. As outside competitors enter the space and Nvidia ramps up its production, this decline will narrow and, more than likely, erode some of its gross margins.
Worse, Nvidia’s four biggest customers by sales — Microsoft, Meta platforms, AmazonAnd the alphabet — all developing their own AI chips. These “magnificent seven” components are either going to reduce its reliance on Nvidia in future years or completely replace its infrastructure in domestic data centers.
All of these factors suggest that Nvidia stock may be in a bubble.
Forget Nvidia: This AI stock has never been cheaper.
But that doesn’t mean all artificial intelligence stocks are in a bubble or at risk of collapsing if history runs out of steam once again. The three AI stocks, which have never been cheap based on forward-year earnings and have one common trait, appear to be smarter buys for investors.
Alibaba
The first AI stock that looks like an exceptional value when placed alongside the infrastructure backbone of the AI movement is none other than Nvidia, China’s leading e-commerce platform. Alibaba (NYSE: BABA).
Most investors are familiar with Alibaba because it is an online retail juggernaut in the world’s No. 2 economy by GDP. Taobao and Tmall combined will control about 51% of China’s e-commerce market share in 2023, according to estimates by the International Trade Association. The country’s growing middle class suggests that e-commerce could provide high growth rates for years to come.
But what investors may not know about Alibaba is that its cloud infrastructure service platform, Alibaba Cloud, accounted for more than a third of China’s cloud infrastructure service spending during the first quarter of 2023. . Building applications that can improve customer interactions. Enterprise cloud spending in China is still in its early innings.
Despite being the undisputed e-commerce and cloud infrastructure service leader in China, Alibaba has never been so affordable. Backed by roughly $92 billion in cash, cash equivalents, and various investments that Alibaba closes in 2023, the company’s shares are trading at less than 5 times next year’s earnings. Even factoring in the regulatory risk factors that put your money to work in China, Alibaba looks like a screaming bargain.
JD.com
Another artificial intelligence stock that is historically cheaper and a smarter buy than Nvidia is China’s No. 2 e-commerce player, JD.com (Nasdaq: JD). That’s right, another chain stock!
As I pointed out with Alibaba, online retail sales in China are still early in their ramp phase, which is great news for the industry as a whole. But JD.com has an advantage that could make it an even more attractive buy than Alibaba. While China’s leading e-commerce company relies heavily on third-party sellers, JD is primarily a direct-to-consumer (DTC) retailer. Like Amazon, it controls the inventory and logistics needed to deliver purchased products to customers. Having more control over the DTC process should yield higher margins in the long run.
While JD.com is nowhere near Alibaba’s level when it comes to AI dominance, it did debut major language model ChatRhino last year. JD’s goal with ChatRhino is to help businesses shorten innovation timelines and quickly solve supply chain problems across various industries. ChatRhino was in development for two years prior to its launch and has the potential to drive JD’s growth rate throughout the decade.
As of the end of 2023, JD was sitting on a treasury of $22.7 billion in net cash, cash equivalents, restricted cash, and various investments. JD is valued at less than 8 times forward earnings, and more than half of its market cap is derived from its net cash balance. All risks seem to be included in JD’s stock at its current price.
Bedouin
A third AI company that has never been cheap at a time when Nvidia’s stock appears to be in a bubble is China’s leading Internet search engine. Bedouin (NASDAQ: BIDU ). In case you haven’t noticed, all of these stocks are characterized by the fact that they are based on the world’s No. 2 economy (China).
Baidu’s core segment has long been its Internet search engine. While Alphabet’s Internet search engine Google dominates globally, Baidu is the kingpin in China. It captured a 60% share of Internet searches in China in February, and with few exceptions, it has maintained a 60% to 85% share of domestic Internet searches nine years ago. If businesses want to target Chinese consumers with their message(s), it is highly likely that they will use Baidu.
More importantly, Baidu is also a key player in China’s fast-growing cloud infrastructure service field. During the quarter ending March 2023, Baidu’s AI Cloud accounted for 8% of spending, ranking fourth in the country behind Alibaba Cloud, Huawei Cloud, and more. Tencent the cloud.
In addition, Baidu is a global leader in intelligent driving. Subsidiary Apollo Go has completed more than 5 million autonomous rides on public roads since its inception.
Rounding things out, Baidu stock is dirt cheap. Shares can be bought now for around 8 times forward year’s earnings. But that doesn’t include the company’s more than $28 billion in net cash, cash equivalents, restricted cash, and various investments. The risk-versus-reward profile is overwhelmingly supportive.
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John Mackey, former CEO of Whole Foods Market, is a member of the board of directors of The Motley Fool, an Amazon subsidiary. Randy Zuckerberg, former director of market development and spokeswoman for Facebook and sister of MetaPlatforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Suzanne Frey, an Alphabet executive, is a member of The Motley Fool’s board of directors. Sean Williams has positions in Alphabet, Amazon, Baidu, JD.com, and MetaPlatforms. The Motley Fool has positions in and recommends Alphabet, Amazon, Baidu, JD.com, MetaPlatforms, Microsoft, Nvidia, and Tencent. The Motley Fool recommends Alibaba Group and 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.
Artificial intelligence (AI) stock Nvidia may be in a bubble, but these 3 AI stocks have never been cheaper Originally published by The Motley Fool