Looking for the next big thing in AI and tech stocks? Find out why a single buy player may be a better choice than a household name.
Chip designer Nvidia (NVDA -1.45%) has become a hot topic. Its 147% total return over 52 weeks is among the top 10 best performers on the S&P 500. (^GSPC -0.05%) index. The company has benefited greatly from the artificial intelligence (AI) boom that began at the end of 2022. Leading AI experts rely on Nvidia chips to train their systems.
As a result, Nvidia has a market value of $3.6 trillion. The company is, by some measures, the world’s largest company, and many investment experts still think it can continue to rise.
Examples are numerous and illustrative. According to The Motley Fool’s Spring 2024 research report, Nvidia is among the top 10 holdings of many billionaire hedge funds. Philippe Lafont’s Courtet Management and Ken Griffin’s Citadel Fund held more Nvidia shares than any other company. Six months later, Ray Dalio’s Bridgewater Associates and David Tepper’s Appaloosa Management were buying up NVIDIA stock.
Should you do what most billionaire fund managers do and buy Nvidia stock?
So Nvidia has fans. You might want to follow their example and buy Nvidia stock in January 2025. After all, the generative AI craze is still in its infancy and will likely yield significant benefits in the future. As the early king of the AI hardware hill, Nvidia is the company to beat.
Again, professionals cannot meet every request. If you can hit the ball every third swing, you’re easily eligible for the Baseball Hall of Fame. In investing, the percentage may be higher, but every genius strikes out quite often.
And I’m not sure if Nvidia is a buy at this point. Overzealous investors expect perfect performance over many years and appear to build unrealistic assumptions into inflated stock prices. Additionally, there is the law of large numbers, which explains that it is more difficult to generate large profits from very large market capitalizations.
If you want to invest in the generative AI market right now, I recommend leaving Nvidia alone. Another semiconductor company leverages the same resources, and its stock looks really cheap compared to Nvidia’s valuation.
Micron Technology: The discreet AI champion
I’m talking about memory chip specialist Micron Technology. (MU -1.09%). The company is actually a prominent partner of Nvidia, providing large amounts of high-speed memory for its AI accelerator cards. In fact, Nvidia CEO Jensen Huang recently named Micron as a key supplier of critical components. That comment was enough to send Micron’s stock price up more than 6% in one day.
But it’s not an exclusive deal. The company serves a wide range of customers around the world, from consumers to large enterprises. One of Micron’s customers accounted for more than 10% of the company’s revenue in fiscal year 2024. Although management did not name the customer in its business report, this large customer ordered memory chips in the mobile, embedded, and computer systems markets. These signs won’t sit well with Nvidia, which doesn’t do much in the mobile space. Instead, they are pointing to iPhone maker Apple. (AAPL -0.20%) or Android owner’s alphabet (GOOG 0.50%) (Google 0.42%).
In other words, Micron operates a diversified business and no single customer is critical to the company’s performance. At the same time, Micron will record significant sales when Nvidia finds a buyer for its high-end AI products. Why pick the winners of the AI hardware wars when you can buy shares in Micron, which partners with almost any company?
What don’t you like about Micron and its stock?
I haven’t talked about Micron’s modest valuation yet. The stock price forecast P/E ratio is 4.2 times, and next year’s forecast P/E ratio is 9.8 times. The company recently reported several years of negative bottom line profits due to the cyclical nature of the computer memory market and ultimately the severe economic downturn sparked by the COVID-19 pandemic. It was revived from.
Micron emerged from the crisis with an unparalleled portfolio of innovative memory products. The company is the only notable memory chip maker not based in South Korea, and its American-tinged business model should serve it well in a time of intense international trade disputes.
This stock has many advantages over Nvidia at the moment. Much cheaper. Stocks could rise on positive trends in non-AI markets, such as smartphones and modern cars equipped with chips. And the memory chip industry, in which Micron plays a leading role, will undergo periodic upturns.
Four of the 16 billionaire-led funds in the report also held large amounts of Micron stock. Time will tell which fund group made the right move, but I have high hopes for the Micron team.
Alphabet executive Suzanne Frye is a member of The Motley Fool’s board of directors. Anders Bylund has held positions at Alphabet, Micron Technology, and Nvidia. The Motley Fool has positions in and recommends Alphabet, Apple, and Nvidia. The Motley Fool has a disclosure policy.
