The Soaring Nvidia Stock: AI Triumph or Market Bubble?
Wall Street serves as a hotbed of groundbreaking concepts and innovations. From the internet revolution to genome sequencing, 3D printing, blockchain technology, and the metaverse, each wave generated its own share of excitement. Yet, it’s artificial intelligence (AI) that emerges as the unparalleled game-changer of them all.
AI empowers businesses to deploy software and systems in overseeing tasks traditionally human-led. Through machine learning, these systems evolve, enhance their efficiency, and even acquire new skills over time. The transformative utility of AI spurred researchers at PwC to project a potential $15.7 trillion boost to global GDP by 2030.
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Challenges Facing the Nvidia Star in the AI Galaxy
Among the myriad publicly traded companies set to ride the AI wave, none have basked in brighter prospects than Nvidia (NASDAQ: NVDA). Nvidia’s A100 and H100 graphics processing units (GPUs) have emerged as the AI-accelerated data center gold standard. In the fiscal year ending Jan. 28, 2024, Nvidia’s data center revenue swelled more than threefold to $47.5 billion. While innovation propelled this meteoric rise, Nvidia’s ace has been its pricing supremacy.
Nonetheless, this golden era for Nvidia could meet an untimely demise, echoing historical patterns. Over the past three decades, virtually every nascent trend experienced an early-stage bubble. There’s a recurring tendency among investors to overestimate the adoption pace of new tech frontiers, and AI might not defy this norm.
But there’s more looming in the shadows than historical precedents. Nvidia risks cannibalizing its gross margin as it ramps up GPU and Blackwell chip production. The upsurge in data center sales during fiscal 2024 was driven by GPU scarcity. Yet, with rivals stepping into the arena and Nvidia upscaling its output, this scarcity could dissipate, chipping away at its gross margin.
Further complicating matters, Nvidia’s top four customers including Microsoft, Meta Platforms, Amazon, and Alphabet are delving into AI chip development, potentially reducing dependency on Nvidia’s infrastructure in the future.
Exploring Undervalued AI Gems Beyond Nvidia
Nonetheless, not all AI stocks are perched on the precipice of a bubble burst. Three AI stocks, currently trading at historically low forward-year earnings-based valuations, and sharing a common trait, may represent more prudent investment choices.
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Alibaba: China’s AI Jewel in the E-Commerce Arena
One such undervalued gem is China’s e-commerce titan, Alibaba (NYSE: BABA), which stands out as an exceptional AI stock compared to the AI module backbone, Nvidia.
While Alibaba’s dominance in online retail in the second-largest global economy is widely acknowledged, its cloud infrastructure arm, Alibaba Cloud, seized over a third of China’s cloud service expenditure in Q1 2023. Leveraging generative AI tools, Alibaba Cloud helps businesses develop customer-centric applications, tapping into the nascent phase of enterprise cloud outlays in China.
Unlocking Bargains: AI Stocks in China
The Alibaba Advantage
Alibaba closed out 2023 with a staggering $92 billion in cash, cash equivalents, and various investments, a treasure trove that has investors salivating. Despite regulatory risks in China, Alibaba’s shares are currently trading at less than 5 times consensus forward-year earnings, a potential goldmine for value-seeking investors.
JD.com: The Sleeper Pick
China’s No. 2 e-commerce player, JD.com, emerges as an enticing prospect for investors seeking AI exposure. Unlike Alibaba, JD.com operates predominantly as a direct-to-consumer (DTC) retailer, akin to Amazon in the U.S., granting it a unique edge in controlling its inventory and logistics to bolster margins over time. With $22.7 billion in net cash and a valuation of less than 8 times forward earnings, JD.com stands as a hidden gem in the Chinese market.
Baidu: The Undervalued Leader
Baidu, China’s top search engine, presents an alluring opportunity with its dominant position in the local search market, maintaining a stronghold with a market share ranging from 60% to 85% over the past decade. Apart from search, Baidu’s foray into cloud services and intelligent driving through subsidiary Apollo Go accentuates its diversified revenue streams. With shares trading at approximately 8 times forward-year earnings and boasting over $28 billion in cash reserves, Baidu’s stock appears severely undervalued.
As investors weigh their options, the landscape of AI stocks in China offers a treasure trove of opportunities, ripe for the taking. While tech giant Nvidia may be capturing the spotlight, companies like Alibaba, JD.com, and Baidu present compelling cases for investment, backed by sound financials, strategic positioning, and innovative growth prospects. In the ever-evolving realm of artificial intelligence, these Chinese stocks promise to be diamonds in the rough, waiting to shine brighter as the market uncovers their true value.