If you’d asked me 12 months ago for my opinion on the best artificial intelligence (AI) stock, I would have said chip designer Nvidia (NASDAQ: NVDA). In an article posted this time last year, in which I discussed how I was playing the theme, I said that it was “my number one play for AI exposure”.
Today, however, Nvidia stock is trading more than 200% higher than it was back then. That’s an enormous gain in just a year. So do I still see it as the best AI stock in the market? Let’s discuss.
Powering the AI revolution
The way I see it, Nvidia is still the most important player in the AI ecosystem.
Recently, pretty much all of the Big Tech companies (Microsoft, Alphabet, Amazon, Meta, etc.), have been buying Nvidia’s chips to power their AI applications. Without its products, we wouldn’t be seeing the same kind of innovation from these companies.
Looking ahead, Nvidia chips are likely to power the next wave of AI innovation.
Earlier this year, the company introduced its new Blackwell chips, which are designed to help companies build and run generative AI applications with less energy consumption and costs. These are likely to see very high demand from the Big Tech companies.
Generative AI is the defining technology of our time. Blackwell is the engine to power this new industrial revolution. Working with the most dynamic companies in the world, we will realise the promise of AI for every industry.
Jensen Huang, CEO of Nvidia
Huge share price increase
Now, when a stock rises more than 200% in the space of 12 months, it usually ends up trading at a pretty high valuation.
But that’s not actually the case with Nvidia.
You see, over the last year, the company’s revenues and earnings have soared due to the high demand for its AI chips.
So, while its share price has risen exponentially, its price-to-earnings (P/E) ratio hasn’t done the same.
For the current financial year, Wall Street analysts expect Nvidia to generate earnings per share of $24.90. At today’s share price, that equates to a forward-looking P/E ratio of 36.
That’s actually about 50% lower than the company’s P/E ratio at this time last year, believe it or not. In other words, the stock is significantly cheaper than it was 12 months ago.
At that earnings multiple, the stock is not that expensive, in my view.
It’s worth noting that a lot of Wall Street analysts now have share price targets of between $1,100 and $1,200.
The best AI stock?
Having said all that, I’m not rushing to buy the chip stock at current levels.
After a 200% gain in 12 months, I’d rather wait for a decent pullback before buying more shares. Because there are a few risks that could lead to share price volatility in the short term.
One is lower-than-expected guidance in the company’s Q1 results on 22 May. Another is new AI chip products from companies like Apple.
Don’t get me wrong – I’m still very excited about this stock in the long run.
But if I had to name my best AI stock today, I’d probably go with Alphabet or Amazon instead as they’re a little bit less hyped at present.
