Alphabet (NASDAQ:GOOGL) and NVIDIA (NASDAQ:NVIDIA) are two of the market’s most highly valued businesses and among the most anticipated beneficiaries of AI technology. The search giant and the GPU major, however, have very different business models, growth opportunities and risk profiles. Today, let’s take a look at Alphabet and NVIDIA to see which of the stocks is a better buy in the current market.
Alphabet Is The New Heir To The AI Throne
While Alphabet is certainly nothing new to tech investors, it has emerged as a powerhouse in the world of AI. Between its AI-powered search results and its Gemini chatbot, Alphabet has been one of the leading businesses in the artificial intelligence revolution. Moreover, it’s set to invest more than most of its peers in AI infrastructure going forward, thus likely widening its lead. While concrete details haven’t been released, management has said that it plans to significantly increase its CapEx next year.
Despite its growing power in the AI world, Alphabet’s largest asset remains its essentially uncontested dominance in the world of online search. Google’s market share among search engines worldwide is still about 90 percent, despite longstanding beliefs that the rise of AI chatbots could eat into its moat. This is also still a surprisingly strong growth business, as evidenced by the double-digit growth in Google Search revenue detailed in the Q3 earnings report.
Thanks to longstanding business lines like Google and YouTube, Alphabet also has some fairly remarkable financial characteristics. Chief among these is its massive free cash flow, which over the past 12 months alone has totaled $73.5 billion. Alphabet also boasts trailing 12-month net margins, ROIC and ROE all in excess of 30 percent.
It’s interesting to note that Alphabet shares also aren’t terribly expensive by the standards of today’s high-flying tech stocks. While GOOG does trade at a premium valuation of 31.6 times earnings, several of the Magnificent Seven stocks that make up its peer group are priced at considerably higher multiples. Even so, analysts currently seem to believe that GOOG may have gone as high as it is likely to for the time being. The consensus price target for the stock is $311.21, representing a slight downside of about 2.8 percent from the most recent price of $320.28.
Alphabet is also expected to keep its EPS growth above 15 percent annually through the next 3-5 years. Supporting this growth is likely to be a strong ongoing trend of share repurchases. So far this year, Alphabet has deployed over $40 billion to buy back shares. By repurchasing shares using its massive free cash flows, Alphabet can reward long-term shareholders who will gradually see their shares concentrated as the years go on.
NVIDIA Dramatic Growth, Now U-Turn?
To say that NVIDIA has been a dramatic growth story as AI has taken off would be an understatement. Once a maker of GPUs primarily for gaming, the chipmaker has achieved a market cap of $4 trillion and become by far the largest supplier of the chips fueling the AI revolution. This sudden surge in growth over the last several years has also allowed NVIDIA to become an extraordinarily profitable business, with trailing 12-month net margin, ROIC and ROE standing at 53.0 percent, 99.1 percent and 110.7 percent, respectively.
Even more importantly for investors, NVIDIA’s growth is expected to carry on well into the future. Per-share earnings are expected to keep rising by more than 37 percent annually through the next five years, more than double the rate expected for Alphabet over the same time frame. In its Q3 earnings report, NVIDIA also provided Q4 revenue guidance of $65 billion, up from Q3’s record revenue of $57 billion.
Behind NVIDIA’s expected growth is a gigantic surge in the need for data center capacity from AI hyperscalers, a group of businesses that includes Alphabet. Industry-wide CapEx on data centers could grow to as much as $4 trillion by 2030, with NVIDIA poised to be the prime beneficiary of this spending due to both its existing dominance in the market and its ongoing innovation as it keeps increasing the computing power of its processors.
One area in which NVIDIA may struggle against Alphabet is in its valuation. Priced at 44.7 times earnings and 57.3 times operating cash flow, NVIDIA is considerably more expensive than Alphabet. It’s worth noting that analysts still project an average of over 38 percent worth of upside for NVDA shares over the next 12 months, but the market seems to be increasingly skeptical of NVIDIA’s high price tag. Shares of NVIDIA have faltered recently, staying essentially flat over the last three months. Alphabet, by contrast, has gained 54 percent over the same period.
Although NVIDIA is currently projected to beat Alphabet both in terms of upside and earnings growth, investors may want to keep in mind the higher risks that could accompany NVDA. As essentially an AI pure-play, NVIDIA is highly exposed to investor sentiment about the emerging technology. With fears of a bubble growing and a general rethinking of how much value AI technology will realistically create in the near future, NVDA could be vulnerable to a significant short-term selloff if the market downgrades its views on artificial intelligence.
Google Vs NVIDIA Stock: Which Is Best?
In deciding which of these two stocks is the better buy, it’s important to first acknowledge that both Alphabet and NVIDIA are extremely high-quality businesses that are likely to have substantial long-term growth opportunities ahead of them. As such, much of the choice between the two likely comes down to the amount of growth they could produce, their respective valuations and how much risk they carry.
From a risk-tolerant perspective, NVIDIA’s higher projected growth rate may look extremely appealing. It’s important to understand, however, that investors today are paying a much higher premium for NVDA and assuming the pure-play AI risks described above. With the market already starting to look shaky when it comes to the most expensive AI stocks, this could make NVIDIA overly risky for some investors.
Alphabet, on the other hand, has the ability to generate significant growth from AI while also having absolute dominance in the online search business propping it up. As a result, GOOG may be less exposed to a selloff if some of the air is let out of AI stocks in the near future. The stock is also priced more modestly when compared to its trailing earnings. On the downside of Alphabet, though, its projected growth rate is expected to be less than half of NVIDIA’s, and the stock has much less expected short-term upside than NVDA.
Weighing all of these factors, Alphabet may come out as a slightly better option than NVIDIA for many investors. While its projected growth may be lower, it also appears to carry a significantly lower level of risk. It’s also worth noting that Alphabet is still expected to deliver double-digit EPS growth through the next half-decade, likely giving it substantial long-term compounding power. And, if the market doesn’t sell AI stocks off, Alphabet is likely to benefit from the technology’s growth due to its high level of expected CapEx on new data centers and its ability to integrate AI into its already valuable lines of digital products and services.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.