Nvidia's (NVDA -2.09%) stock has soared about 27,340% over the past 10 years. The explosive growth of its data center business, which sells high-end GPUs for processing complex artificial intelligence (AI) tasks, fueled a large portion of those gains and turned it into a linchpin and bellwether of the booming AI market.
The market's demand for Nvidia's data center GPUs is still outstripping its supply as more companies upgrade their servers to handle the latest AI applications. Its revenue surged 126% in fiscal 2024 (which ended in January 2024), and analysts expect it to continue growing at a compound annual growth rate (CAGR) of 57% from fiscal 2024 to fiscal 2027 as its earnings per share (EPS) rises at a CAGR of 345%.
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Based on those rosy expectations, Nvidia's stock doesn't seem overvalued at 31 times next year's earnings. But its long-term growth could still be throttled by competition from cheaper chipmakers, the development of first-party AI accelerator chips, tighter U.S. export curbs against Chinese companies, and a recent antitrust probe in China.
So while Nvidia might still be a great play on the AI market, investors should recognize those potential risks and keep a close eye out for other promising AI stocks. Let's check out two of those other names -- Innodata (INOD -1.88%) and Taiwan Semiconductor Manufacturing (TSM -0.70%) -- and see if they're worthwhile alternatives to Nvidia.
A small-cap hypergrowth stock: Innodata
Innodata went public in 1993, and it was considered a slow-growth IT services and enterprise software company for many years. However, its stock surged from around $1 at the end of 2019 to nearly $35 as of this writing. That massive rally was driven by the rollout of its new generative AI training services for five of the "Magnificent Seven" companies.
In the past, Innodata mainly provided business process, technology, and consulting services -- along with software tools for managing and distributing digital data -- for the government, aerospace, defense, financial services, and tech sectors. From 1994 to 2019, its revenue only grew at a CAGR of 6% as it struggled to grow in the shadow of larger companies like IBM and Microsoft.
But over the past few years, many of those tech leaders struggled to efficiently prepare large amounts of high-quality data for their new AI applications. Many large companies reportedly spent 80% of their time preparing their data for an AI project and the remaining 20% on actually training the AI algorithms. To address those inefficiencies, Innodata rolled out a suite of task-specific microservices for preparing custom data for AI applications in 2018.
From 2019 to 2023, Innodata's revenue grew at a CAGR of 12% amid the market's growing demand for its AI training services. From 2023 to 2026, analysts expect its revenue to rise at a CAGR of 42% as it generates more revenues from its Magnificent Seven clients and expands its customer base. It's also expected to turn profitable in 2024 and grow its EPS at a CAGR of 21% over the following two years.
With an enterprise value of $1 billion, Innodata still looks reasonably valued at 45 times forward earnings and five times next year's sales -- so it could have plenty of room to run.
The megacap backbone of the AI market: TSMC
Nvidia couldn't produce its top-tier chips without TSMC, the world's largest and most technologically advanced contract chipmaker. TSMC's foundries are used to produce the smallest, densest, and most power-efficient chips for "fabless" chipmakers like Nvidia, AMD, Qualcomm, and Apple, so it's basically the backbone of the semiconductor sector.
Nvidia's brisk sales of AI chips are generating tailwinds for TSMC's high-performance computing (HPC) market, which accounted for 51% of its revenue in the third quarter of 2024. For the full year, TSMC expects its revenue to grow nearly 30% -- accelerating from its 9% decline in 2022 -- as the PC and smartphone markets stabilize and the AI market expands. Intel's recent foundry troubles should also drive more fabless chipmakers to tighten their relationships with TSMC.
In 2025, TSMC plans to widen its lead over Intel and Samsung by ramping up its production of its smallest and densest 2-nanometer chips. From 2023 to 2026, analysts expect its revenue and EPS to grow at a CAGR of 25% and 29%, respectively, as that growth cycle advances.
Based on those expectations, TSMC looks like a bargain at 18 times next year's earnings. That valuation might reflect some uncertainties regarding the export curbs against China and the geopolitical tensions regarding Taiwan, but it's still one of the simplest ways to profit from the growth of the AI and semiconductor markets.
Should you buy these two stocks instead of Nvidia?
Compared to Nvidia, Innodata might attract more speculative growth investors, while TSMC might be a more conservative play on the booming AI market. I don't think either stock can be considered a full replacement for Nvidia in an AI-oriented portfolio -- since the chipmaker is still selling the best picks and shovels for the AI gold rush -- but they could complement its growth and represent alternative ways to diversify your AI-oriented holdings away from Nvidia.
