AI stocks vs EV shares; which is the best sector for me to invest in?

Jon Smith considers the recent rally in AI stocks and weighs up whether to allocate more money there versus EV shares.

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At the moment, the two hottest sectors in the market are artificial intelligence (AI) and electric vehicles (EVs). EV shares did better last year, but AI stocks have dominated 2024 so far. As a long-term investor without endless amounts of money, I think it wise to look and see which area is the best for me to allocate more cash to.

Starting with AI

It’s impossible to talk about AI and not talk about Nvidia (NASDAQ:NVDA). The poster child for the sector is up 205% over the past year. The bulk of this has come from investor excitement regarding AI.

Nvidia is best placed to take advantage of this. It designs graphic processing units (GPUs) and other application programming interfaces, which are heavily used to train and develop AI-related systems.

The surge in demand for both hardware and software is evident in company financials. Incredibly, the Q1 results this year recorded revenue of $26bn. This was less than $1bn off the total annual revenue from 2021.

The growth here could continue to be huge, but the problem with Nvidia is the same as with the AI sector in general. Investors are used to earnings beating expectations. Seeing a stock that simply goes up may be anticlimactic, so that it’s going to be harder and harder to maintain this.

Part of this comes from a high valuation, which is already making some question whether AI is forming a bit of a bubble. Yet there’s also concern that the stock could drop if it doesn’t reach what is now becoming such a high benchmark of expectations.

EV shares in the spotlight

Historically, Tesla has been the EV stock that has mirrored Nvidia in being the flag bearer for the sector. Yet the market is becoming more diverse now, as others are starting to eat away at the market share. This includes the likes of BYD and NIO from Asia, along with traditional car firms like Ford.

The 31% drop in the Tesla share price over the past year is evidence of this. Yet even though some might want to stay away from Tesla by itself, the sector as a whole is still very much in a growth phase.

For example, 18% of all cars sold last year were electric. This was up from 14% in 2022. The market is still growing but has a huge way to go in the years to come. This should benefit all the major EV manufacturers in terms of profitability.

A risk is that EVs could be caught in the crosshairs by tariffs. Earlier this week, the European Commission announced that tariffs of up to 50% could be placed on imported, Chinese-made EVs. This could hamper demand.

The bottom line

As a sector, I think that EVs have a more attractive valuation right now. Buying a basket of multiple EV firms is definitely something that I’m thinking about doing. AI is also the future, but I feel it’s a little bit of a bubble right now.

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.

Jon Smith has no position in any of the shares mentioned. The Motley Fool UK has recommended Nvidia and Tesla. 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.

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