Key Points
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A high market cap doesn’t mean a stock is overpriced.
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Nvidia’s valuation is high, but its strong earnings suggest it’s not that expensive.
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Many top artificial intelligence (AI) stocks trade at far higher earnings multiples than Nvidia.
- 10 stocks we like better than Advanced Micro Devices ›
Over the past five years, Nvidia (NASDAQ: NVDA) has generated returns of more than 950%, and along the way, it has become the most valuable company in the world. It’s not a speculative buy as its valuation is backed by strong financials and profit growth. Even though its market cap of $5 trillion may suggest it’s expensive, its price-to-earnings (P/E) multiple is 33, which is higher than the S&P 500 average of 26, but still nowhere near as high as some other stocks.
Given the company’s robust opportunities in artificial intelligence (AI), it’s not hard to make a case that it’s worth a sizable premium. And it’s a downright bargain when you compare it to the following AI stocks, which trade at far higher multiples.
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Broadcom: 66 times earnings
Custom chipmaker Broadcom (NASDAQ: AVGO) has also benefited from enormous demand due to AI. As tech companies seek cheaper alternatives to Nvidia’s high-priced chips, Broadcom has been a popular option. Its growth rate was 48% in its most recent quarter (which ended May 3). And the company says that semiconductor revenue due to AI rose by 143%, coming in even higher than its forecast.
Demand has been through the roof, and investors have been paying a huge premium for the stock, which trades at a P/E multiple of 66. It’s a steeper premium than Nvidia. Not only does the higher valuation make Broadcom a bit of a riskier holding, but with a high dependency on demand from hyperscalers, there’s the danger that its growth rate could take a hit if tech giants cut back on AI investments, which could happen in the future as spending has been coming under the microscope of late.
Broadcom’s stock has been struggling in recent weeks as its strong quarter wasn’t enough to convince investors it’s still worth buying; it’s down about 20% from its 52-week high.
Palantir Technologies: 150 times earnings
The only non-chip stock on this list is Palantir Technologies (NASDAQ: PLTR). The data analytics company has an AI-powered platform that helps governments and commercial customers make better, faster, and smarter decisions. It has gained notoriety for its popularity on the battlefield and the U.S. government being a key customer.
During the first three months of this year, the company’s revenue rose by 85%, and CEO Alex Karp boasted of the company’s Rule of 40 score now being a whopping 145%. But while its adjusted margins look solid, the reality is that on a per-share basis, its earnings aren’t all that high in relation to its share price. Its earnings per share came in at just $0.34 for the quarter, which extrapolates out to around $1.36 for an entire year — that’s fairly low for a stock that’s trading at around $130.
Even though the business is doing well, investors are paying a massive premium, as its P/E multiple is around 150, even after the stock has declined 25% this year.
Advanced Micro Devices: 188 times earnings
The most expensive stock on this list belongs to a company that has long been seen as Nvidia’s key rival in the chip space: Advanced Micro Devices (NASDAQ: AMD), better known as just AMD. The company hopes that its newest chips become viable alternatives for Nvidia customers to consider.
While its growth rate has been improving, it arguably isn’t that high to warrant the premium the stock trades at. For the period ending March 28, the company’s revenue rose by 38% to $10.3 billion. While both management and investors are bullish for more growth ahead, the problem is that with the stock trading at a P/E of 188, that may already be priced in at this stage. If AMD fails to deliver strong and potentially even better numbers than it did in its most recent quarter, the stock could be due for a sell-off, given how pricey it has become.
AMD’s stock has skyrocketed more than 160% this year, but in doing so, it is now a far more expensive stock than Nvidia. With a lot still to prove, it’s not the safest option out there for AI investors right now.
Should you buy stock in Advanced Micro Devices right now?
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David Jagielski, CPA has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Broadcom, Nvidia, and Palantir Technologies. The Motley Fool has a disclosure policy.
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