These dominant technology companies have long been at the forefront of the Internet age.
With a price increase of 2,620% in the last five years and an increase of 184% only in 2024 (as of October 25), Nvidia remains the talk of the town. The artificial intelligence (AI) hardware manufacturer is benefiting from strong demand for its products and services, fueling rapid growth.
Nvidia deserves credit for the way it dominates the AI infrastructure market. It’s also very difficult to overestimate how incredible the share price performance has been.
But I believe investors should forget about Nvidia. It might be a better idea to buy these two AI stocks instead.
Two leading AI companies
Investors should consider two well-known stocks whose products and services they likely use every day. I’m talking about Alphabet (GOOGL -1.92%) (GOOG -1.96%) And Metaplatforms (META -4.09%). These companies have long been leaders in the Internet age and are poised to become leaders in the ongoing AI race.
Alphabet CEO Sundar Pichai shifted the company’s focus to AI-first eight years ago. Thanks to a huge fortress balanceWith approximately $90 billion in total cash and marketable securities, Alphabet has virtually unlimited resources to aggressively invest in technical infrastructure to support its AI ambitions.
“The momentum within the company is extraordinary. Our commitment to innovation, as well as our long-term focus and investments in AI, is paying off: consumers and partners benefit from our AI tools.” Pichai said in the Third Quarter 2024 Earnings Report.
Meta and its founder and CEO, Mark Zuckerbergare also intensively focused on AI. The technology is available in the company’s various social media apps, allowing users to create images and get answers to questions.
The company also sees a future where AI can dramatically help advertisers. “Eventually we got to the point where our advertising system could predict who would be interested better than the advertisers themselves,” Zuck said on the company’s second-quarter 2024 earnings call. The company plans to spend up to $40 billion on capital expenditures this year to support AI ambitions.
Many positive factors
In addition to riding the AI wave, Alphabet and Meta Platforms have other attractive features that investors should pay attention to. For starters, both companies dominate the digital advertising market, a powerful secular trend with a lot of growth potential. Grand View Research believes the industry will be worth as much as $1.2 trillion by 2030, growing at an annual rate of 15.5% between 2023 and the end of the decade.
This favorable backdrop means that Alphabet and Meta should post notable revenue gains in the coming years. Between 2023 and 2026, revenue at the Google parent company is expected to increase at a compound annual growth rate of 11.7%, while revenue at the social media giant is expected to rise at an annual rate of 15.6%. These are certainly encouraging predictions.
Alphabet and Meta also own both network effects that support their economic moats. Google Search and YouTube become more valuable to their stakeholders as they grow. The same goes for Meta, as more users result in more content and more connections. This setup makes it nearly impossible for a competing company to create competing services that can gain widespread adoption, which in my opinion creates minimal threat of disruption.
Finally, I will emphasize how strong the financial position of these companies is. They both generate huge amounts of cash, while also having impeccable balance sheets. This reduces the financial risk for investors.
What about ratings?
Nvidia’s monumental rise has taken its valuation to a high level. At the time of writing, the shares are trading at a price of future price-earnings ratio (P/E). of 49.8.
Some strong proponents may believe this valuation multiple is justified. But I think the shares are expensive because of the incredible optimism the market has towards this company. In other words, there appears to be no margin of safety in Nvidia stock right now.
Paying the right valuation should be an important part of every investor’s decision-making process. This is where Alphabet and Meta stand out. The former trades at a price-to-earnings ratio of 22, while the latter can be bought at a multiple of 27.4. These are much more reasonable prices to pay than what Nvidia is selling for.
Investors shouldn’t think about it too much: buying shares of both Alphabet and Meta can provide ample exposure to the AI trend.
Suzanne Frey, a director at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, former director of market development and spokeswoman for Facebook and sister of Mark Zuckerberg, CEO of Meta Platforms, is a member of The Motley Fool’s board of directors. Neil Patel and his clients have no positions in the stocks mentioned. The Motley Fool holds positions in and recommends Alphabet, Meta Platforms, and Nvidia. The Motley Fool has a disclosure policy.
