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Many people have pointed out that Nvidia (NVDA 0.49%) I’m avoiding artificial intelligence (AI) because it’s the best investment at the moment. Because Nvidia is a hardware company, this strength will eventually wear off and investors will end up owning a valuable stake in a business they no longer own.
Instead, a much better alternative to Nvidia is: alphabet (GOOG -1.16%) (Google -1.33%), Google’s parent company. There are now four reasons why Alphabet is a much better long-term investment than his Nvidia, and why its business is sustainable.
1. Alphabet’s products are subscription-based
As mentioned earlier, Nvidia is a hardware company. Nvidia’s graphics processing units (GPUs) are best-in-class for training AI models. However, once you sell the GPU, that’s it. Unless the customer comes back in the future to build additional supercomputers or upgrade the system, Nvidia’s sales will be his one-time profit.
Alphabet is a large purchaser of Nvidia GPUs, but it has set up a subscription model to use these products. One of Alphabet’s most exciting divisions is its cloud computing division, Google Cloud. By equipping their data centers with powerful Nvidia GPUs, clients who need access to the best computing power can rent it from Alphabet. This allows these clients to keep their assets lightweight and quickly scale up or down depending on their needs. The revenue stream from this business is much more sustainable as it occurs on a regular basis.
Additionally, Alphabet also offers other AI products, such as the generative AI model Gemini. The model beat competitors in multiple tests and will be implemented in various programs, creating a new revenue stream for Alphabet.
Nvidia’s one-time sales can provide gaudy year-over-year growth in good times, but they aren’t as sustainable as Alphabet’s subscription-centric approach.
2. Nvidia experienced the first wave of AI benefits
Nvidia is a company of choice, so it saw the first wave of AI demand. Companies like Alphabet ordered thousands of GPUs for their data centers, causing a sudden spike in demand. Investing in a company during a surge in demand is not a good idea as many high expectations are already baked into the stock.
Alphabet recognizes the growing demand for cloud computing and generative AI, but it’s still in its early stages. This means Alphabet hasn’t had a rush yet, which makes me even more excited to get into Alphabet stock before the big move happens.
3. Alphabet’s stock price is much cheaper than Nvidia’s stock price
Another problem with Nvidia stock is that it’s soaring. Nvidia’s price-to-earnings ratio is much higher than Alphabet’s valuation, and there are a lot of expectations built into it.
GOOGL PE Ratio Data by YCharts
Alphabet doesn’t have much hype about its stock, which trades at about the same level as other companies. S&P500the expected P/E is 20.
If Alphabet maintains its current status, it will continue to be a market-beating stock. If Nvidia misses expectations, the stock price will fall out.
4. Alphabet is more balanced even if AI stalls
Finally, Alphabet is much more diversified than Nvidia. If this AI trend fails (and I don’t think it will), a significant portion of Nvidia’s business will disappear. This is not the first time something like this has happened to Nvidia, as the company’s revenue plummeted as demand fell due to the collapse of multiple cryptocurrencies.
Many investors (myself included) are excited about Alphabet’s AI prospects, but at the end of the day, nearly 80% of the company’s revenue comes from advertising services. Advertising has been around for thousands of years, and it doesn’t seem like it’s going away anytime soon.
So no matter how successful AI adoption is, Alphabet should be fine.
To me, Alphabet is a much better investment than Nvidia right now. Nvidia may be able to continue doing well through the remainder of 2024, but its non-subscription business model means it could eventually suffer from a decline in demand. If you like roller coasters, Nvidia may be a better stock, but it may never return to the highs it experienced in its early years. But if you like beating the stable market, Alphabet is a much better choice.
Alphabet executive Suzanne Frye is a member of The Motley Fool’s board of directors. Keithen Drury holds a position at Alphabet. The Motley Fool has positions in and recommends Alphabet and Nvidia. The Motley Fool has a disclosure policy.
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