The artificial intelligence (AI) boom has been driving Nvidia's (NVDA -2.37%) stock higher for two years now. Can the chip designer's shares keep rising from here or is it time to shift your focus to a lower-priced tech stock like Alphabet (GOOG -1.85%) (GOOGL -1.75%) instead?
Let's find out.
The bull case for Nvidia
Nvidia's annual sales stopped at $27.0 billion in fiscal year 2023 (which ended on January 29, 2023 -- equivalent to fiscal year 2022 for most companies). Less than two years later, the company generated more than twice that much in free cash flows. Revenues over the trailing twelve-month period have skyrocketed to $113.3 billion.
NVDA Revenue (TTM) data by YCharts
This is a golden age for Nvidia and its investors. Nvidia is one of the world's most valuable companies for good reason, since it also ranks near the top in terms of profitability. As the hardware provider behind OpenAI's game-changing ChatGPT platform, Nvidia's order book is bulging as every technology expert under the sun wants to build their own AI solutions.
The stock may be a bit expensive at 54 times adjusted earnings and 30 times sales, but those metrics peaked at 247x and 46x in the summer of 2023. If you bought Nvidia shares at the very top of that valuation crunch, you'd have a 139% gain by Dec. 26, 2024. If anything, Nvidia shares look more affordable nowadays, arguably setting investors up for great returns in the long run.
The bull case for Alphabet
If you like Nvidia's financial results, you'll love Alphabet's. The Google parent saw $340 billion in top-line revenues over the last four quarters, converting 55.8 billion into free cash flows. Sure, Nvidia just peeked above Alphabet's cash flow line but that's at the tail end of a two-year downturn in the online advertising market, and Alphabet invested $49 billion in data center upgrades and other infrastructure moves over the last year. Nvidia at its best is barely outperforming Alphabet at its worst.
Many investors have focused on the ad-market downturn recently. As a result, Alphabet's Class A shares trade at just 26 times earnings and 7.1 times sales today.
I could go on for ages and pages, listing the many reasons to buy Alphabet stock in 2024. Long story short, the company was designed for longevity in a rapidly changing economy, is deeply involved in the AI boom from the software and services angle, and comes with a very affordable stock anyway. What's not to love about Alphabet?
I'd much rather buy Alphabet today
Nvidia's business is soaring but its surging growth is already priced into the stock. It could continue to rise in 2025 and beyond, but its valuation ratios should compress over time. Also, the company's dominant market position might fade out as a plethora of rivals bring out competing AI accelerator chips. You shouldn't sell all your Nvidia stock today, but it's only a "hold" recommendation for me.
Alphabet is the best of both worlds -- a great business paired with an affordable stock. At the same time, the digital ad market is swinging back from that inflation-inspired downturn and the Google segment's revenues should soar in the next couple of years. And the market makers have apparently not accounted for this incoming growth spurt in their valuation models for Alphabet.
So Nvidia is a reasonable stock to hold in the long run, but I'm not in a rush to buy more of it. Alphabet, on the other hand, is one of my favorite stocks to buy and hold forever. If your diversified portfolio doesn't have exposure to this incredible stock yet, it's high time to hit Alphabet's "buy" button.
