No doubt about it, artificial intelligence (AI) is the hottest thing on Wall Street right now. And it's not just hype. Leading AI services are already changing the game and shaking up various industries, and it seems AI is poised to an important tech trend.
While many companies are jockeying for leadership in AI, Nvidia (NVDA 3.40%) and Alphabet (GOOGL 3.11%) (GOOG 3.10%) are two leading players in the space. Notably, these two companies also have very different valuation profiles.
Which stock is the better buy right now? Read on to see why two Motley Fool contributors disagree on which company you should be putting your money behind.
Nvidia is powering a massive tech shift
Keith Noonan: Nvidia is a risky stock right now. The company's share price has surged 170% across this year's trading, and its market capitalization has been pushed to roughly $1 trillion. While the company's share price gained ground thanks to quarterly results and forward guidance that crushed the market's expectations, it's also probably fair to say that hype has played a big role in the semiconductor specialist's massive stock gains this year.
But it would be a mistake to write Nvidia off just because excitement surrounding AI played a big role in powering its stock gains this year. Prior to the company's last earnings report and guidance update, the average Wall Street target was calling for the company to deliver revenue of roughly $7.15 billion in the second quarter. With its subsequent forecast, Nvidia made it clear that it actually expects to record $11 billion in revenue in Q2.
For a company of its size, this kind of performance outlook beat is virtually unprecedented. AI applications are powering a huge increase in demand in the data center segment, but that's not the only reason to be excited about Nvidia stock. While selling highly advanced processors will continue to be a core foundation of the business, the company is also branching into offering AI computations and software as a service.
On the surface, Nvidia's valuation profile looks much riskier than Alphabet's -- and it's undeniably more growth-dependent.
NVDA PE Ratio (Forward 1y) data by YCharts
On the other hand, Nvidia appears to be on track to provide hardware and services that power disruptive movements in the tech sector. Meanwhile, Alphabet actually may be at some risk of having its core business -- search and digital advertising -- disrupted by the rise of AI.
Alphabet stock is an excellent value right now
Parkev Tatevosian: Alphabet stock might be one of the better opportunities available in the market today. A confluence of factors has decreased Alphabet's stock price to inexpensive territory. Most importantly, the rise of large language models like ChatGPT threatens to take a share of the lucrative search revenue business Alphabet is accustomed to dominating.
Some of the concern is warranted. However, I argue that investors are overreacting to the hit taken by Alphabet's business. After all, Alphabet countered with a large language model to make its search engine more effective.
Alphabet's operating income has jumped from $28.9 billion to $74.8 billion in the previous five years. Even accounting for a slowdown in growth due to competition in search, Alphabet's operating income is likely to remain robust.
GOOG PE Ratio (Forward 1y) data by YCharts
However, due to the fear of a massive disruption to its business, investors can buy Alphabet's stock at a forward price-to-earnings ratio of 19.6, which is an inexpensive valuation for this growth stock.
Typically, investors find it more expensive to buy growing businesses that boast excellent operating profits. As a result, this opportunity may not last very long.
Which AI stock is the better buy?
For investors who may be torn between investing in Nvidia or investing in Alphabet, there's a tale of two valuation profiles to be considered. Nvidia stock has soared this year and now trades near its record high. It looks significantly more expensive than Alphabet on a forward price-to-earnings basis.
But Nvidia will likely see much stronger earnings growth than Alphabet this year and next. It could also be a much bigger winner from the overall AI trend. Accordingly, investors should weigh their personal risk tolerance and portfolio goals before deciding which stock is the more suitable buy right now.
For those looking to build broad-based AI exposure, investing in both stocks could be worthwhile. AI is still a young industry that's expanding fast, and it's difficult to predict how individual facets will progress.
