Beyond Nvidia: Exploring Alternative AI Investment Opportunities in 2024

Forget Nvidia: 2 Tech Stocks to Buy Instead | The Motley Fool

These companies are more fairly valued and rely less on AI progression to drive business growth. Nvidia (NVDA -7.04%) has been on a remarkable run over the past year and a half. Not only is its stock up over 670% since the beginning of 2023, but its revenue in its most recent quarter (ended April 28) grew an impressive 262% year over year. Nvidia has artificial intelligence (AI) mania to thank for its recent successes. It became the go-to option for its state-of-the-art graphic processing units (GPUs) that power many of the world's data centers (more on that to come). Both investors and tech customers have been flocking to Nvidia to take advantage of the newfound AI momentum. That said, Nvidia's recent stock price growth made the stock absurdly expensive (66 P/E ratio), leaving it more susceptible to a correction if it underdelivers in the slightest. That's why the following two stocks may be better options right now for investors interested in the tech sector. Taiwan Semiconductor Manufacturing, (TSM -3.42%) also known as TSMC, is the largest semiconductor (chip) foundry in the world, powering many of the electronics we use in our daily lives. With TSMC's foundry model, it creates chips specifically for customers' needs instead of general sales. This gives it a much more personal relationship with many of its customers and increases its importance to the tech world. TSMC chips are used in smartphones, car infotainment systems, gaming consoles, GPUs, and many other products. Given the importance of TSMC's chips in creating GPUs, there's arguably no company as vital to Nvidia as TSMC. Nvidia's ability to meet the surge in demand for its GPUs largely depends on TSMC's manufacturing capacity. Without these chips, GPU quality likely suffers, which then bleeds over into data centers and, ultimately, many of the AI applications and services consumers interact with. So far, though, this reliance hasn't posed a problem for TSMC. In the second quarter, it made $20.8 billion in revenue, up 33% from a year ago. TSMC's high-power computing (HPC) segment, which includes AI-related chips, generated 52% of the revenue, up from 46% in the first quarter. It expects revenue from AI-related chips to grow at a 50% compound annual growth rate over the next five years, which would make it around 20% of TSMC's total revenue. Although TSMC's stock is up close to 60% this year, it dropped by over 6% in the past month, giving investors a more attractive price to consider. With a price-to-earnings ratio close to 29, the stock isn't cheap, but the company's importance can make it justifiable for long-term investors. Microsoft (MSFT -0.89%) stock had an impressive year, but the past month has been a bit brutal. The stock is down by over 9% since early July, bumping it down to the world's second-most valuable company after spending the better part of the last year up top. Microsoft was seemingly ahead of the game when it first began its partnership with ChatGPT's creator, OpenAI, back in 2019 with a $1 billion investment. It has since expanded its partnership with OpenAI and both parties seem to be playing an equal part in the deal. OpenAI gets to use Microsoft's cloud service, Azure, for its infrastructure and supercomputing power. In return, Microsoft gets to integrate OpenAI's AI technologies into its large suite of products and services. It's a move that makes perfect sense for Microsoft, considering the money, personnel, and time it would take to build these capabilities in-house. Microsoft is arguably the most well-diversified big tech company, with its hands in seemingly all things enterprise. It's the go-to for many products and services for businesses globally, which has helped it ensure its longevity as a tech titan. Nvidia, on the other hand, will rely heavily on GPUs, making its business and continued growth reliant on AI adaption (which has yet to be seen in the long term). Microsoft's all-but-ensured longevity makes it easier to justify its high 36.8 P/E ratio if you're in it for the long haul. That's expensive by most standards, but dollar-cost averaging your way into a stake could pay off well down the road.

Why I'm Not Touching This Artificial Intelligence (AI) Chip Stock With a 10-Foot Pole in 2024 | The Motley Fool

Soaring interest in artificial intelligence (AI) has spotlighted chip stocks since the start of last year. These companies develop the hardware that makes the generative technology possible, indicating they have much to gain as the AI market develops. Market leader Nvidia (NVDA -7.04%) has highlighted the significant potential of these companies, delivering stock growth of 674% since January 2023 alongside soaring earnings. The company's business has exploded thanks to the domination of its AI graphics processing units (GPUs). As a result, Advanced Micro Devices' (AMD -0.94%) second-largest market share in GPUs and prominent role in chip designs have rallied investors. The company has caught the eye of Wall Street, with many analysts just waiting for it to follow in Nvidia's footsteps. Bulls have pumped up AMD's stock price by 116% since the start of 2023. However, AMD's performance over the past year makes it a hard sell. Its stock is trading at 206 times its earnings, as its financials haven't kept up with its stock growth. Meanwhile, Nvidia's overwhelming dominance in AI and other competitors could make it challenging for AMD to gain traction in the industry. So, here's why I'm not touching this AI chip stock with a 10-foot pole in 2024. AMD has made some encouraging inroads in artificial intelligence over the last year, unveiling a range of new AI-capable chips to better compete with Nvidia, attracting prominent customers like Microsoft and Meta Platforms to its latest offerings. However, rising competition in the market suggests AMD will need to find its own niche in AI to see big gains over the long term. Nvidia has likely secured years of dominance in AI GPUs, with its chips accounting for about 85% of the industry and the company supplying its hardware to the companies above. Meanwhile, fellow chipmaker Intel (INTC -2.27%) is in a similar position to AMD as it strives to steal market share from Nvidia with new chips. Intel has also unveiled multiple chips since last year to challenge Nvidia. However, Intel has seemingly recognized the challenge Nvidia's dominance poses and is simultaneously seeking to lead other areas of AI to diversify its position. Over the last year, Intel has invested billions into expanding its manufacturing capacity, announcing plans to build at least four chip plants in the U.S. as it seeks to become the world's biggest AI chip manufacturer. So, while Nvidia is ruling AI GPUs and Intel strives to become a leading chip fabricator, AMD is almost in no man's land until it finds a way to differentiate itself from its competitors and lead its own subsector of the industry. Nvidia's headstart in AI has done more than allow it to gain market share. It has also massively expanded the company's financial resources and ability to reinvest in its business. Meanwhile, declines in AMD's earnings over the last year could make it harder for the chipmaker to compete in AI. This chart shows AMD's free cash flow, quarterly revenue, and operating income have been hit hard over the last 12 months. Meanwhile, Nvidia has become a more formidable opponent, extending its financial lead. The difference saw AMD's free cash flow reach just over $1 billion this year, while Nvidia's hit more than $39 billion. AMD has actually delivered some impressive growth in its AI-focused division, with data-center revenue rising 80% year over year and client sales increasing by 85% in the first quarter of 2024. However, declines in other segments meant total revenue for the quarter increased just 2% year over year. For reference, Nvidia's revenue rose 262% for the same period. Since 2014, AMD's desktop GPU market share has fallen from 35% to 12%, while Nvidia's climbed from 65% to 88%. Both companies include desktop GPU sales in their respective gaming segments, as consumers mainly use these chips to build high-performance gaming PCs. AMD saw its gaming revenue plunge 52% in Q1 2024, but Nvidia's soared 45% higher. AMD's soft performance over the last year has allowed its biggest rival to pull further ahead. With more extensive cash reserves, Nvidia's leading position in AI could be more challenging for AMD to compete against. Despite the above concerns, AMD's one saving grace would be if its stock traded at a ridiculously great value. However, the unfortunate reality is that its shares offer some of the worst value in tech, as its stock growth hasn't aligned with rising earnings. This chart shows AMD's price-to-earnings (P/E) ratio running significantly higher than many of the most prominent names in AI and tech. The figures indicate that AMD's stock offers the least value among these companies. Meanwhile, the stock's P/E value is considerably higher than its 10-year average P/E of 154, only strengthing the case against owning AMD shares. Due to its lack of market dominance in AI and less-than-stellar earnings, I would steer clear of AMD's stock in 2024 and consider one of its rivals instead.

Opinion: This Is the Most Overlooked Artificial Intelligence (AI) Stock to Buy Right Now | The Motley Fool

After all, the chip designer trades at a lofty price-to-sales ratio of 50, but that's not the best way to evaluate the stock. Arm is highly profitable, generating a 43.6% adjusted operating margin in its fiscal year ended in March. That means that on the more conventional price-to-earnings basis, the stock is still expensive, but more reasonably priced, especially considering its accelerating growth rate and its long-term potential in AI chips. Less than a year from its IPO last September, Arm stock has tripled, but there are still several reasons for it to keep gaining. Let's take a look at a few of them. Arm operates differently from most of its semiconductor peers. Rather than selling its chips to end users, Arm designs architecture that it then licenses to chip partners like Nvidia, Apple, and Alphabet. Additionally, its monetization model is also unique. The company brings in revenue in two ways. First, it generates licensing revenue when it signs new licensing agreements with its partners. However, the bulk of its revenue comes from royalties when its partners actually sell the products built on Arm technology. Royalty revenue generally lags behind new license agreements by one or two years, which means that Arm should see a boom in royalty revenue over the next couple of years as it's seen a spike in new license agreements. License revenue jumped 60% in its most recent quarter, driven by surging demand for AI and Arm's new v9 technology. Its v9 technology also commands a higher royalty rate, which should help drive expanding margins as well. Arm rose to prominence thanks to its power-efficient architecture, which is prized in devices like smartphones where battery efficiency is superlative. That's why Arm's designs can be found in 99% of premium smartphones around the world. However, that efficiency advantage is also proving to be valuable in AI as large language models and other AI programs use enormous amounts of power, making Arm's architecture especially valuable for data centers. To meet growing demand for AI components, Arm has also launched compute subsystems (CSS), which are pre-packaged configurations of the company's technology designed for specific end markets and use cases, opening up another valuable revenue stream that should help it meet the large and growing demand for AI hardware as the business world is racing to deploy its own generative AI models. Tech companies tend to be conservative with guidance, choosing to give targets that they know are within reach, and Arm seems to be operating with the same playbook. For example, the company called for revenue growth of 22% in fiscal 2025, which is down from 47% in the fourth quarter, a significant step lower. Based on its recent momentum, Arm should easily be able to beat that -- the company looks set to benefit from continued growth in AI and its close relationship with Nvidia, which is leading the AI revolution, as well as the shift from licensing revenue to royalty revenue, which makes up the majority of its revenue. Wall Street analysts are calling for similar growth, forecasting 24.5% top-line growth this year. As Arm benefits from the jump in royalty revenue, demand for its new v9 architecture, and the growth of the AI data center, its revenue growth seems likely to top that. As Arm raises its guidance, the stock should move higher as well. Over the long term, Arm looks well positioned to take advantage as the AI revolution marches on.

2 Artificial Intelligence Stocks to Buy Hand over Fist Right Now | The Motley Fool

The U.S. stock market has seen multiple ups and downs in the past decade. While trends such as e-commerce, blockchain, cryptocurrency, cannabis, and cloud computing have influenced the market, none may have as far-reaching effects as the artificial intelligence (AI) trend. According to a forecast from Statista, the global AI market could grow at a compound annual rate of 28.46% from $184 billion in 2024 to $826.7 billion in 2030. Not surprisingly, the AI exposure of many companies has driven their stocks to dizzying highs. However, some AI-powered stocks such as Alphabet (GOOG 1.45%) (GOOGL 1.51%) and Oracle (ORCL -0.50%) may still have enough upside potential to make them top picks to buy now and hold for the long run. Digital advertising titan Alphabet -- owner of Google Search, YouTube, Google Cloud, the Android mobile operating system, and the recently launched Gemini large language model -- has been facing several AI-associated challenges in recent times. The advancements made by OpenAI and Microsoft in generative AI have been disruptive for Alphabet's core Google search business. However, to withstand these pressures, Alphabet launched its own generative artificial intelligence-based family of Gemini models. The family comprises models of four different sizes, each designed for its own set of use cases and suited for different deployment environments. Gemini 1.5 Pro can handle 2 million tokens -- which is the longest context window of any large-scale foundational model to date. Gemini can process various forms of data inputs including text, audio, images, and video, and can allow complex interactions. Gemini enables developers to create applications requiring extensive context for various use cases. Gemini has been integrated across all of Alphabet's core offerings to improve their overall user experiences. The company is now rolling out AI Overviews (an advanced AI-powered feature powered by the Gemini model) in its Google Search offering. Besides seeing positive trends in the testing phase in search usage and user satisfaction, the company also noted higher user engagement from users aged 18 to 24 when Google Search was combined with AI overviews. Alphabet has also expanded the types of queries it can answer with AI features such as Visual Search via Lens and Circle to Search on 100 million Android mobile devices. Among the signs that these features are helping the company maintain its search market dominance, revenues from the "Google Search & other" business segment jumped by 13.8% year over year in the second quarter. Alphabet's Google Cloud business crossed the $10 billion quarterly revenue mark for the first time in the second quarter and generated over $1 billion in operating profit. YouTube also remains a major growth driver, and in June, it extended its streak as the most-watched streaming platform on U.S. televisions to 17 consecutive months. YouTube is benefiting from rising viewer engagement and the increasing shift of advertising budgets from linear television to connected television. Alphabet is also making progress in monetizing its short-form video offering, Shorts. Alphabet had $101 billion in cash and marketable securities on its books at the end of the second quarter, and it generated $60.8 billion in free cash flow over the past four reported quarters. Despite this, the company trades at a price-to-sales multiple of 6.75, significantly lower than many AI companies. Considering its many AI-powered growth catalysts, its robust financials, and its currently reasonable valuation, Alphabet may deliver top-notch results in the coming years for investors who buy it now. As one of the world's best AI data center infrastructure players, Oracle is benefiting dramatically from increasing demand for the computing power and storage required to train large language models. The explosive growth in demand for Oracle's cloud services pushed its remaining performance obligation (a measure of order backlog) up by 44% year over year to $98 billion in the fourth quarter of its fiscal 2024 (which ended March 31). The company's revenues rose by just 6% to $53 billion. However, management is guiding for double-digit percentage revenue growth in its fiscal 2025, and anticipates revenues from cloud infrastructure services will soar even faster than the 50% growth reported in fiscal 2024. Oracle's cloud infrastructure services and enterprise applications are widely considered more cost-effective, faster, and secure than those of their competitors in training large language models. The company also offers multiple deployment options, including public cloud, multicloud, sovereign cloud, and even dedicated cloud. Not surprisingly, prominent tech companies such as OpenAI, Nvidia, Microsoft, and Alphabet use Oracle's cloud services and data centers. It is seeing a dramatic increase in sales momentum, and so far in 2024, it has signed more than 30 AI contracts worth a total of nearly $17 billion. Oracle recently launched Exadata Exascale, a cost-effective and intelligent data architecture for high-performance cloud computing. This will help it target more cost-sensitive customers. The last impressive factor for Oracle is that the stock is currently trading at 7 times trailing 12-month sales, lower than the software industry's median sales multiple of 9. At this reasonable valuation, the stock seems like a worthwhile pick for smart buyers.