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Artificial Intelligence (AI) Stock Nvidia May Be in a Bubble, But These 3 AI Stocks Have Never Been Cheap

Wall Street is a breeding ground for innovation. Since the advent of the Internet thirty years ago, there has been a long list of next-big-thing trends and innovations, including genome decoding, 3D printing, blockchain technology and the metaverse, to name just a few. few. However, none of these trends offer the game-changing potential that artificial intelligence (AI) brings.

With AI, companies use software and systems to oversee tasks that would normally be assigned to humans. Machine learning gives these systems and software the ability to evolve over time and become more effective at their tasks, and potentially learn new tasks as well. The broad utility of AI forced PwC researchers to estimate that it could add $15.7 trillion to global gross domestic product (GDP) by 2030.

A visibly concerned person looking at a rapidly rising and then falling stock chart displayed on a tablet.

Image source: Getty Images.

Nvidia shares have soared thanks to AI, but may be in a bubble

While there are dozens of publicly traded companies that will benefit from the AI ​​revolution, none has received a more immediate boost than the AI ​​revolution Nvidia (NASDAQ: NVDA). Nvidia’s A100 and H100 graphics processing units (GPUs) have become the standard in AI-accelerated data centers. With Nvidia meaningfully increasing production of its flagship AI GPUs, the company is unlikely to lose much in terms of data center market share – at least in the first half of the year.

In fiscal 2024 (ending January 28, 2024), Nvidia’s data center revenue more than tripled to $47.5 billion. While innovation did all the talking, Nvidia’s biggest “weapon” was its pricing power. Enterprise demand for powerful GPUs has swamped supply, allowing Nvidia to quickly increase the selling price of its units.

Unfortunately, this fairytale story for Nvidia may end sooner or later if history has anything to say about it.

Over the past thirty years, there hasn’t been a single “next big thing” trend that hasn’t involved an early-stage bubble. History has shown that investors have a terrible habit of overestimating the adoption of a new technology, trend or innovation. Artificial intelligence is unlikely to be the exception to this unwritten rule.

But there is more to worry about than just historical correlations. There is real potential for Nvidia to cannibalize its own gross margin as it expands production of its prized GPUs and the newly introduced Blackwell chip. GPU scarcity was the main driver of data center revenue growth in fiscal 2024. As external competitors enter and Nvidia ramps up its own production, this scarcity will diminish and, more than likely, erode some gross margin.

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Even worse, Nvidia’s four largest customers by revenue — Microsoft, Metaplatforms, AmazonAnd Alphabet — are all developing their own AI chips. These “Magnificent Seven” components will reduce their dependence on Nvidia or completely replace infrastructure in internal data centers in the coming years.

All these factors suggest that Nvidia stock may be in a bubble.

Forget Nvidia: these AI stocks have never been cheaper

But this doesn’t mean that all artificial intelligence stocks are in a bubble or at risk of collapse when history rhymes again. Three AI stocks, which have never been cheaper based on next year’s earnings and have a common characteristic, seem like much smarter buys for investors.

Two students view content on a shared laptop.Two students view content on a shared laptop.

Image source: Getty Images.

Alibaba.com

The first AI stock that seems like a phenomenal value when placed next to the infrastructure backbone of the AI ​​movement, Nvidia, is none other than China’s leading e-commerce platform. Alibaba.com (NYSE: BABA).

Most investors are familiar with Alibaba because it is an online retail giant in the world’s second largest economy by GDP. According to 2023 International Trade Association estimates, Taobao and Tmall held nearly 51% of China’s e-commerce market share on a combined basis. The country’s fast-growing middle class suggests that e-commerce could deliver superior growth rates in the coming years.

But what investors may not know about Alibaba is that its cloud infrastructure services platform, Alibaba Cloud, accounted for more than a third of China’s cloud infrastructure services spending in the first quarter of 2023. Alibaba Cloud leans on generative AI solutions to help companies build applications that can improve customer interactions. Enterprise cloud spending in China is still in its infancy.

Despite being the undisputed leader in e-commerce and cloud infrastructure services in China, Alibaba’s valuation has never been cheaper. Leaving roughly $92 billion in cash, cash equivalents and miscellaneous investments behind, Alibaba closed out 2023 with the company’s shares trading at less than five times consensus for the next few years. Even when you factor in the regulatory risk factors associated with putting your money to work in China, Alibaba seems like a bargain.

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JD.com

A second artificial intelligence stock that is historically cheap and would make for a smarter buy than Nvidia is China’s No. 2 e-commerce player. JD.com (NASDAQ: JD). That’s right, a second China share!

As I mentioned with Alibaba, online retail sales in China are still in their early stages, which is fantastic news for the entire industry. But JD.com has an advantage that may make it an even more attractive buy than Alibaba. While China’s largest e-commerce company relies heavily on third-party sellers, JD is primarily a direct-to-consumer (DTC) retailer. Like Amazon, it controls the inventory and logistics required to get purchased products to consumers. Having more control over the DTC process should lead to superior margins in the long run.

While JD.com is nowhere near the same level as Alibaba when it comes to AI dominance, it did debut the major language model ChatRhino last year. JD’s goal with ChatRhino is to help companies shorten innovation timelines and quickly resolve supply chain issues across industries. ChatRhino was in development for two years prior to launch and has the potential to increase JD’s growth for the remainder of the decade.

At the end of 2023, JD was sitting on a treasury of $22.7 billion in net cash, cash equivalents, restricted cash and miscellaneous investments. JD is valued at less than eight times forward earnings, and more than half of its market capitalization is derived from its net cash balance. All the risks appear to be baked into JD’s stock at the current valuation.

Baidu

The third AI company that has never been cheaper at a time when Nvidia shares appear to be in a bubble is China’s largest internet search engine Baidu (NASDAQ: BIDU). In case you haven’t noticed, the thing these stocks all have in common is that they are based in the second largest economy in the world (China).

Baidu’s fundamental segment has long been the Internet search engine. Although Alphabet’s Internet search engine Google dominates worldwide, Baidu is the kingpin in China. The country had 60% of Internet searches in China in February and, with few exceptions, has captured a 60% to 85% share of domestic Internet searches for nine years. If companies want to reach Chinese consumers with their message(s), there is a good chance that they will use Baidu.

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More importantly, Baidu is also a major player in China’s fast-growing cloud infrastructure services arena. During the quarter ended March 2023, Baidu’s AI Cloud had grabbed an 8% share of spending, ranking fourth in the country behind Alibaba Cloud, Huawei Cloud and Tencent Cloud.

Moreover, Baidu is the world leader in intelligent driving. Subsidiary Apollo Go has completed more than 5 million autonomous journeys on public roads since its inception.

In short: Baidu shares are dirt cheap. Shares can now be bought for around 8 times next year’s earnings. But that doesn’t take into account the company’s more than $28 billion in net cash, cash equivalents, restricted cash and miscellaneous investments. The risk versus reward profile is largely positive.

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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 spokeswoman for Facebook and sister of Mark Zuckerberg, CEO of Meta Platforms, is a member of The Motley Fool’s board of directors. Suzanne Frey, a director at Alphabet, is a member of The Motley Fool’s board of directors. Sean Williams has positions in Alphabet, Amazon, Baidu, JD.com and Meta Platforms. The Motley Fool holds positions in and recommends Alphabet, Amazon, Baidu, JD.com, Meta Platforms, Microsoft, Nvidia, and Tencent. The Motley Fool recommends Alibaba Group and recommends the following options: long January 2026 $395 calls to Microsoft and short January 2026 $405 calls to Microsoft. The Motley Fool has a disclosure policy.

Artificial Intelligence (AI) Stock Nvidia May Be in a Bubble, But These 3 AI Stocks Have Never Been Cheaper Originally published by The Motley Fool

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