AI Stocks Poised to Outperform Nvidia
Source: nasdaq.com
Nvidia's stock has surged in recent years because of its chipmaking capabilities. However, its leading position faces a threat from the increasing capabilities of competitor chipmakers. Amazon and Meta Platforms could gain more from AI in the long run compared to Nvidia.
Nvidia has become one of the most valuable companies in the world due to its GPUs. These chips are important for training large language models and using them in various applications. Tech companies have been rapidly buying Nvidia's chips to enhance their AI capabilities. Nvidia is approaching a market capitalization of $4 trillion, with only Microsoft having a value exceeding $3.5 trillion. It is predicted that two other companies will exceed Nvidia's valuation within three years, despite currently being worth between 50% and 60% of Nvidia's market value.
Nvidia's Growth and Challenges
Nvidia is approaching the $4 trillion milestone, a mark achieved after rapid growth. The company's value was less than $1 trillion just a couple of years ago. Nvidia's strong stock performance is driven by impressive revenue growth. Total revenue increased by 69% in the first quarter, reaching $44.1 billion. The company also maintained a high gross margin due to high demand for its new chip designs. The adjusted gross margin for the first quarter was 71.3%. This combination has resulted in significant earnings growth.
While Nvidia has maintained its lead in the GPU space, competitors are improving their performance. Also, a large portion of Nvidia's business is concentrated among a few major customers. These customers are actively shifting AI workloads to custom chip designs from other chipmakers to improve cost performance. They also seek alternatives to Nvidia to avoid potential price increases. While Nvidia is expected to continue leading in AI chip sales, its stock price does not reflect these risks. This makes it a potentially risky investment, with slower stock growth expected over the next three years.
Potential Surpassers: Amazon and Meta Platforms
Two undervalued tech companies have the potential to surpass Nvidia in market capitalization. Amazon operates the second-largest retail business and the largest cloud computing platform worldwide. Like Nvidia, Amazon's business has benefited from increased AI spending. Despite a slow start in generative AI, Amazon Web Services (AWS) has maintained its leading position by offering AI services to developers. During the first-quarter earnings call, CEO Andy Jassy mentioned that the AI business is generating billions in revenue for AWS and growing at a triple-digit percentage. This growth has increased the operating margin for AWS, which rose to 39.5% in the first quarter. Management reports that demand exceeds server supply, leading to significant investments in capacity expansion, with total capital expenditures expected to exceed $100 billion this year, primarily for new data centers.
Amazon's substantial investment in its cloud computing business is supported by its retail operations' recent strength. The company has significantly increased its operating margin through a reorganization of its U.S. logistics, enabling faster shipping speeds while keeping shipping expenses low as a percentage of sales. Additionally, Amazon's high-margin advertising sales have grown strongly. The North American retail operating margin has increased to 6.6% over the last 12 months, and the international segment has turned positive. Amazon's value is expected to increase due to the continued success of its cloud and retail operations. As the leading cloud provider, Amazon is well-positioned to attract enterprises adopting AI. The company is also projected to experience strong free-cash-flow growth over the next three years because of growing spending on AWS with smaller increases in capital expenditures, potentially reaching $100 billion in free cash flow. A 2.5% free-cash-flow yield could result in a $4 trillion valuation.
Meta Platforms is the largest social media company globally, with over 3.4 billion users across its apps. It is also a leading developer of VR and AR technology. Meta has invested heavily in AI, particularly generative AI, to transform its business. The company plans approximately $70 billion in capital expenditures this year to build data centers and has been on a hiring spree. This includes a $14.3 billion investment in Scale AI, which resulted in the company's CEO joining Meta to lead its new AI super intelligence lab. Meta is working to improve its models after its Llama 4 model was not well-received. The impact of AI on Meta's operations is already evident. Ad revenue increased by 16% in the first quarter due to higher engagement and ad prices, with potential for further boosts from AI advancements. Meta is developing an AI agent to develop, test, and optimize ad campaigns, which could attract more advertisers and increase spending. AI's ability to tailor ads to individuals could also result in higher conversions, supporting increased ad spending on Meta's platform. This capability also highlights Meta's ability to develop AI-generated content to boost user engagement and increase advertising opportunities. Meta is experimenting with AI-generated content in its feeds, which should support strong revenue growth despite heavy investments in generative AI and its Reality Labs segment. Increased consumer adoption of wearables like Meta's AI glasses or Oculus headsets could further support margin expansion. The stock trades at 29 times forward earnings expectations, but Meta is expected to outperform expectations over the next three years, leading to rapid stock growth. Even with average earnings growth of 14.5% over the next three years, in line with analysts' expectations, the stock could increase by more than 50%, approaching $3 trillion.