The technology sector is currently experiencing something of a renaissance, as breakthroughs in artificial intelligence (AI) have sparked new interest from investors.
Among the biggest opportunities in AI are a small cohort of large-cap technology companies, collectively called the “Magnificent Seven.” Over the past year and a half, a semiconductor company Nvidia (NASDAQ:NVDA) grossed 628% – more than any other member of the Magnificent Seven.
Nvidia undoubtedly plays an important role in the AI revolution, and its near-term prospects look very good. But what about in the long term?
Among his peers of the Magnificent Seven, I see Amazon (NASDAQ:AMZN) as the superior investment opportunity. Let’s explore why Nvidia is currently on a roll and assess the chipmaker’s long-term prospects compared to Amazon.
Nvidia is supercharged, but competition persists
Generative AI applications, such as training large language models, machine learning, and accelerated computing, rely on a few key components. Namely, sophisticated semiconductor chips known as graphics processing units (GPUs), as well as data center network services, are an integral part of AI use cases.
Right now, Nvidia sits ideally at the intersection of GPUs and data center operations. Currently, the company is estimated to hold 80% of the addressable AI chip market.
This significant lead translated into record revenues, margins and cash flow.
The slope of the lines in the chart above highlights Nvidia’s dominance. Demand for the company’s chips and data center services is robust and has provided Nvidia with a lucrative source of pricing power. However, Advanced microsystems And Intel are developing a suite of alternative GPUs.
While neither company has anywhere near Nvidia’s market share today, the long-term tailwinds fueling AI suggest there could be an opportunity to catch up as Nvidia does facing the challenge of matching customer demand trends with supply production.
Additionally, Nvidia doesn’t just face competition from other chip companies. Metaplatforms and Amazon are both working on their own internally developed chips in an effort to move away from their reliance on Nvidia.
While I don’t see either company migrating from Nvidia in the near future, the longer-term picture suggests that some of Nvidia’s major customers may be a less significant source of growth several years from now.
Why I consider Amazon the best investment
Today, Amazon is best known for its e-commerce marketplace and cloud computing infrastructure: Amazon Web Services (AWS). However, Amazon has a number of other opportunities in its ecosystem, including streaming, grocery delivery, and advertising.
This diverse business is what makes me most optimistic about Amazon’s long-term prospects, as the company has a unique opportunity to amplify its reach by integrating AI throughout its operations.
One of the most lucrative moves Amazon has already made is its $4 billion investment in AI startup Anthropic. Anthropic uses AWS as its primary cloud provider and trains its generative AI models on chips developed by Amazon.
Additionally, Amazon also recently committed $11 billion to build data centers — a move I see as major validation that the company is serious about moving away from Nvidia in the long term.
While long-term gains from these projects are likely in the coming years, I’m optimistic that Amazon is laying the foundation for sustainable growth. Looked at from a different perspective, while Nvidia is currently experiencing triple-digit growth in revenue and earnings, I’m skeptical that the company can sustain such momentum. On the other hand, I think Amazon is just scratching the surface of serving a new wave fueled by aggressive AI ambitions.
The essential
When it comes to choosing between Nvidia and Amazon, I don’t think you can go wrong. Both companies operate from positions of strength and each represents attractive investment prospects.
That said, Nvidia’s stock price has risen sharply over the past two years. Given that competition persists in both data center services and AI-based chips, I don’t see Nvidia maintaining its lead. Ultimately, I believe customers will expand their AI infrastructure and complement existing Nvidia services with those from other vendors.
In turn, this dynamic would lead to a deceleration in Nvidia’s revenue and profitability in the years to come. In contrast, Amazon already has more than $50 billion in free cash flow and $84 billion in cash and equivalents on its balance sheet.
Amazon is in a very good position, financially speaking, and has the flexibility to continue to increase its efforts in AI. As a result, I think Amazon will eventually overtake Nvidia in value as it becomes a more sophisticated company.
Given the disparity in valuation multiples, I would acquire shares of Amazon and plan to hold them for the long term. Nvidia is trading at a notable premium, suggesting that some future growth could be priced into the stock. To me, Amazon’s position in AI is undervalued and the stock looks very cheap right now. I encourage investors to take advantage of this discount and continue to monitor the company’s progress.
Should you invest $1,000 in Amazon right now?
Before buying stocks on Amazon, consider this:
THE Motley Fool Stock Advisor The analyst team has just identified what they think is the 10 best stocks for investors to buy now…and Amazon was not one of them. The 10 selected stocks could produce monster returns in the years to come.
Consider when Nvidia made this list on April 15, 2005…if you had invested $1,000 at the time of our recommendation, you would have $671,728!*
Equity Advisor provides investors with an easy-to-follow plan for success, including portfolio building advice, regular analyst updates, and two new stock picks each month. THE Equity Advisor the service has more than quadrupled the return of the S&P 500 since 2002*.
See the 10 values »
*Stock Advisor returns May 28, 2024
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, former director of market development and spokesperson for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Adam Spatacco holds positions at Amazon, Meta Platforms and Nvidia. The Motley Fool holds positions and recommends Advanced Micro Devices, Amazon, Meta Platforms and Nvidia. The Motley Fool recommends Intel and recommends the following options: long January 2025 $45 calls on Intel and short May 2024 $47 calls on Intel. The Motley Fool has a disclosure policy.
Prediction: This ‘Magnificent Seven’ Artificial Intelligence (AI) Stock Could Be a Better Investment Than Nvidia Over the Next 5 Years was originally published by The Motley Fool