As earnings rise 600%, is Nvidia still the best AI stock to buy?

With the supply and demand equation still looking strong for Nvidia, is the stock still the best AI opportunity for investors?

| More on:

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Nvidia‘s (NASDAQ:NVDA) still growing its earnings at 600% and the stock continues to rise. But after a huge increase in the company’s share price, some investors are looking elsewhere for opportunities in the artificial intelligence (AI) space.

I think this is a mistake. While there might be some excellent opportunities in companies that are going to supply data and power to the AI industry, I think the huge investments in data centres that require Nvidia’s GPU chips are set to continue for some time. 

Demand

Nvidia’s recent success comes down to two things – supply and demand. And there are encouraging signs on both counts. 

On the demand side, the company’s customers have huge resources available. The likes of Microsoft, Amazon, and Meta Platforms are able to spend big and keep doing so. 

Furthermore, CFO Colette Kress noted last week that AI is starting to attract the attention of nation states. As a result, Nvidia’s customers now include entire countries.

It’s natural for investors to wonder how big the market for AI might be. But a look at the potential customers indicates they might not have to worry any time soon.

Supply

If the demand side of the equation looks positive, what about supply? Nvidia has a clear lead in the GPU industry, but the question is, how long this can continue? 

At the moment, there are clear reasons for optimism. The company’s latest chip – Blackwell – is set to launch this year, maintaining the firm’s market position.

Management’s also suggesting there’s more to come next year. So the AI applications that rely on the most sophisticated GPUs are likely to need Nvidia for some time.

Despite this, the price-to-earnings (P/E) ratio the stock trades at is falling steadily. Right now, Nvidia shares trade at a forward P/E ratio of 29, which is slightly lower than Amazon.

Risks

Nvidia’s competitive position looks secure. But the semiconductor industry is one where leadership can change rapidly – as Intel demonstrates. 

Despite spending roughly 10 times as much on research and development, Intel has totally lost what was a dominant market position to rival AMD. There are a few reasons for this.

The most obvious is the company allocated its capital poorly, focusing in the wrong areas. It also probably focused too much on dividends and share buybacks at the cost of innovation.

I’m not saying Nvidia’s likely to do this. But the industry’s one where any mistake could be costly – even for a company that’s clearly out on its own with no obvious competitors.

Is it too late to buy?

Investors need to think carefully before deciding whether or not to buy the shares. The supply and demand equation looks good right now, but there’s more to investing than this.

Gauging what the industry will look like 10 or 20 years from now is difficult. But it’s not at all obvious to me that the stock has reached a level where the moment to buy has passed.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Stephen Wright has positions in Amazon. The Motley Fool UK has recommended Advanced Micro Devices, Amazon, Meta Platforms, Microsoft, and Nvidia. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Person holding magnifying glass over important document, reading the small print
Investing Articles

3 UK stocks I reckon could benefit from the upcoming general election

As the general election hurtles towards us, this Fool wonders which UK stocks could benefit, and focuses on three picks…

Read more »

BUY AND HOLD spelled in letters on top of a pile of books. Alongside is a piggy bank in glasses. Buy and hold is a popular long term stock and shares strategy.
Investing Articles

At 11%, this dividend share pays the biggest yield in the FTSE 100

When a dividend share offers a big yield, we need to be cautious of the risks. But I reckon this…

Read more »

British Isles on nautical map
Investing Articles

I reckon Hiscox shares could be one of the best bargains on the FTSE

I've been investing in FTSE companies for years, but after a major decline I've not seen a company with as…

Read more »

Grey Number 4 Stencil on Yellow Concrete Wall
Investing Articles

4 reasons I’d still buy National Grid shares in a heartbeat despite the recent wobble!

As National Grid shares plunged on the news of a right issue, I’m not flinching, and reckon it's a top…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

After gaining 45% in 12 months, is the Amazon share price now overvalued?

Our author thinks the Amazon share price might be too high. While the long-term future of the business looks bright,…

Read more »

Investing Articles

2 hot dividend stocks I’d buy and hold for 10 years

Our writer reckons these two dividend stocks could help her bag juicy dividends for years to come and explains why.

Read more »

British Pennies on a Pound Note
Investing Articles

2 dividend-paying penny shares I’d happily own

These two penny shares have caught our writer's eye for a combination of income prospects now and business growth potential…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

This FTSE 250 share looks like a bargain to me!

This FTSE 250 share has seen its price tumble due to chaotic local economic conditions in a key market. But…

Read more »