3 Promising AI Stocks That Are Cheaper Than Nvidia

While Nvidia is the most promising AI stock that has surged to sky-high valuations, other promising AI stocks are catching up fast.

| More on:
Digital background depicting innovative technologies in (AI) artificial systems, neural interfaces and internet machine learning technologies

Source: Getty Images

The artificial intelligence (AI) boom triggered a 900% rally in Nvidia (NASDAQ:NVDA) stock, sending it past $1,000 per share. To make the stock more affordable, Nvidia announced a 1:10 stock split that reduced the share price to $100 and gave the stock more flexibility to trade. However, some investors are worried about buying Nvidia stock, which has surpassed the US$3 trillion market cap.

While Nvidia remains unbeatable and the most promising AI stock, you can diversify your AI portfolio with other promising AI stocks trading at a cheaper valuation than Nvidia.

Determining the value of AI stocks

The value of a stock is determined by its earnings potential. However, for tech stocks, the valuation also depends on the sales growth as many companies reinvest their money in research and development.

You could also consider the book value of the share, which is the value of one share as stated in the balance sheet. Suppose a company raises equity capital by selling shares in the market at $100 per share. The $100 per share amount received at the time of the issue is adjusted for profits and losses accumulated over the years after the company sets aside money for reinvestment in future growth. The value arrived at is the book value per share.

I have compiled the valuation ratios of several promising AI stocks that are seeing the impact of AI on their revenue and profit.

Stock TickerStock Price on August 23Forward PEP/SP/BVMarket Cap
NVDA$129.3748.840.464.8$3.2 trillion
MSFT$416.7931.512.711.5$3.1 trillion
TSM$171.2825.911.67.4$767.4 billion
AVGO$166.3627.717.611.1$774.4 billion
AMD$154.9845.510.94.4$250.8 billion
Five AI stock valuation ratios on August 23

Nvidia’s valuation is the highest on all three parameters, hinting it is overvalued.

Choosing three AI stocks cheaper than Nvidia

AMD stock

My first preference would be Advanced Micro Devices (NASDAQ:AMD), which has a comprehensive portfolio of computing chips it is using to build an end-to-end AI infrastructure. Its portfolio comprises central processing units (CPUs) for pre-AI computing, graphics processing units (GPUs) for parallel computing power, and fixed programmable gate arrays (FPGAs) for accelerators. Demand for AI chips drove its data centre revenue up 115% year-over-year to US$2.8 billion and operating income up 405% to US$743 million in the second quarter.

Like Nvidia, AMD also has an asset-light model. It only designs chips and infrastructure and outsources the manufacturing to third-party manufacturers like TSMC (NYSE:TSM).

The AI boom has not yet ticked up AMD’s share price. Among the five AI stocks, it has the lowest price-to-sales (P/S) and price-to-book value (P/BV) ratio. Since it has started capitalizing on AI, it is time to buy the stock before it surges.

TSMC

My second preference is Taiwan Semiconductor Manufacturing Company. It manufactures AI chips designed by Nvidia and AMD, benefitting from their large order books. However, its profit margins are relatively lower as it spends on building advanced fabrication facilities and purchasing high-precision equipment. It bears the risk of factory outage and lower yields in the initial batches. However, volume orders bring in economies of scale.

TSM stock surged 108% in the AI boom (November 2022 to date). Among the five, TSM is trading at the second-lowest P/S and P/BV ratio after AMD. Its forward price-to-earnings ratio is the lowest because of its high production cost.

Broadcom stock

My third preference is Broadcom (NASDAQ:AVGO), which makes communications and networking equipment used to build 5G infrastructure. The company has invested US$3 billion to develop custom AI ASICs (application-specific integrated circuits). It sees a US$150 billion opportunity in AI chips. The AI boom is already reflected in its earnings through increasing demand for networking switches as companies upgrade to AI.

Broadcom has been improving its software offerings through acquisitions, the latest one being that of VMware. These acquisitions increase the cost and grow earnings at marginal rates. Among the five, Broadcom stock is trading at the third lowest forward price-to-earnings (P/E) and P/BV ratio.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Puja Tayal has no position in any of the stocks mentioned. The Motley Fool recommends Advanced Micro Devices, Microsoft, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.

More on Tech Stocks

The virtual button with the letters AI in a circle hovering above a keyboard, about to be clicked by a cursor.
Tech Stocks

Emerging Canadian AI Companies With Big Potential

These tech stocks are paving the way to an AI-filled future, but still offer enough growth ahead for a strong…

Read more »

Young Boy with Jet Pack Dreams of Flying
Tech Stocks

Is Constellation Software Stock a Buy, Sell, or Hold for 2025?

CSU stock has long been a strong option for high growth, high value stocks. But are there now too many…

Read more »

An investor uses a tablet
Tech Stocks

Canadian Tech Stocks to Buy Now for Future Gains

Not all tech stocks are created equal. In fact, these three are valuable options every investor should consider.

Read more »

dividend growth for passive income
Tech Stocks

2 Rapidly Growing Canadian Tech Stocks With Lots More Potential

Celestica (TSX:CLS) and Constellation Software (TSX:CSU) are Canadian tech darlings worth watching in the new year.

Read more »

BCE stock
Tech Stocks

10% Yield: Is BCE Stock a Good Buy?

The yield is bigger than it's ever been in the company's history. That might not be a good thing.

Read more »

Happy shoppers look at a cellphone.
Tech Stocks

So You Own Shopify Stock: Is it Still a Good Investment?

Shopify (TSX:SHOP) stock has had a run, but there's still room to the upside.

Read more »

A person uses and AI chat bot
Tech Stocks

AI Where No One’s Looking: Seize Growth in These Canadian Stocks Before the Market Catches Up

Beyond flashy headlines about generative AI, these two Canadian AI stocks could deliver strong returns for investors who are willing…

Read more »

Data center servers IT workers
Tech Stocks

Better Buy: Shopify Stock or Constellation Software?

Let's dive into whether Shopify (TSX:SHOP) or Constellation Software (TSX:CSU) are the better options for growth investors in this current…

Read more »