The technology sector is currently experiencing something of a renaissance as breakthroughs in artificial intelligence (AI) have sparked renewed investor interest.
Among the biggest opportunities in AI are a small cohort of mega-cap tech companies collectively referred to as the “Magnificent Seven.” A semiconductor company for the past year and a half Nvidia (NASDAQ: NVDA) has given back 628% – more than any other member of the Magnificent Seven.
Nvidia is undoubtedly playing a major role in the AI revolution, and its near-term prospects look very good. But what about the long term?
Among his wonderful seven colleagues, I see Amazon (NASDAQ: AMZN) as the superior investment opportunity. Let’s explore why Nvidia is doing well right now, and assess the chipmaker’s long-term prospects versus Amazon.
Nvidia is supercharged, but the competition is still hanging around
Generative AI applications, such as training large language models, machine learning, and accelerated computing, rely on a number of key components. In fact, advanced semiconductor chips known as graphics processing units (GPUs) and data center networking services are integral to AI use cases.
Right now, Nvidia finds itself conveniently at the intersection of GPUs and data center operations. Currently, the company has an estimated 80% of the AI chip market.
This industry-leading lead has translated into record sales, margins and cash flow.
The slope of the lines in the chart above underlines Nvidia’s dominance. Demand for the company’s chips and data center services is high and has given Nvidia a lucrative source of pricing power. However, Advanced micro devices And Intel are developing a range of alternative GPUs.
While neither company currently has anywhere near Nvidia’s market share, the long-term tailwinds AI is fueling suggest there could be an opportunity to make up ground as Nvidia faces the challenge of keeping up with trends in the matching customer demand with supply.
Moreover, Nvidia does not only 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 dependence on Nvidia.
While I don’t see either company migrating from Nvidia anytime soon, the longer-term picture suggests that some of Nvidia’s key customers could be less important sources of growth in a few years.
Why I see Amazon as the better 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 capabilities in its ecosystem, including streaming, grocery delivery, and advertising.
This diversified business is what makes me most optimistic about Amazon’s long-term prospects, as the company has a unique opportunity to expand 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 Amazon’s own chips.
Additionally, Amazon also recently committed $11 billion to build out data centers – a move I see as a major confirmation that the company is serious about moving away from Nvidia in the long term.
While the long-term benefits from these projects are likely years in the future, I’m optimistic that Amazon is laying the foundation for sustainable growth. Looking at it another way, while Nvidia is currently experiencing triple-digit revenue and profit growth, I’m skeptical that the company can maintain this momentum. On the other hand, I think Amazon is just entering a new wave, fueled by aggressive ambitions with AI.
it comes down to
When it comes to choosing between Nvidia and Amazon, I don’t think you can go wrong. Both companies operate from strong positions and each represent attractive investment prospects.
That said, Nvidia’s stock price has risen sharply in recent years. Considering that competition continues between both data center services and AI-powered chips, I don’t see Nvidia maintaining its lead. I think customers will eventually broaden their AI infrastructure and complement existing Nvidia services with those from other vendors.
This dynamic would in turn result in a slowdown in revenue and profitability for Nvidia in the coming years. By 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 place financially and has the flexibility to continue doubling down on its AI efforts. As a result, I think Amazon will eventually surpass Nvidia in terms of value as it grows into a more sophisticated company.
Given the difference between the valuation multiples, I would pick up shares of Amazon and plan to hold it for the long term. Nvidia is trading at a noticeable premium, suggesting some future growth may be priced into the stock. To me, Amazon’s position in AI is undervalued, and the stock looks dirt cheap right now. I would encourage investors to take advantage of this discount and continue to monitor the company’s progress.
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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. Adam Spatacco has positions at Amazon, Meta Platforms and Nvidia. The Motley Fool holds positions in and recommends Advanced Micro Devices, Amazon, Meta Platforms, and Nvidia. The Motley Fool recommends Intel and recommends the following options: long January 2025 $45 relying on Intel and short May 2024 $47 relying 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 Five Years Originally published by The Motley Fool
