With its $10,000 A100 chips, Nvidia Corp. (NVDA) provides the "rocket fuel" for the spread of artificially intelligent chatbots and image generators.
In fact, Nvidia controls a staggering 95% of the market for the graphics processors that can be used for machine learning.
So it's safe to say that Nvidia is one of the launching pads for mass-market AI technology.
And yet, Quantum Edge Pro Editor Jason Bodner says there's a better AI stock to buy right now.
That's a bold and surprising statement, given how hot Nvidia shares have been of late.
NVDA triggered an Entry Signal in our system on Feb. 21 and has done nothing but climb and climb – from $209 to $309 (47% higher) as of this writing:
It's also a bold statement given that Citigroup analysts expect that ChatGPT usage alone could drive $3 billion to $11 billion in revenue by the end of this year.
To be sure, Nvidia is already an AI heavyweight – and is both a great company and an alluring stock. So if you own it, or have it on a personal watchlist, we're not urging an about face.
We just see an additional opportunity.
Let's do a quick run-through on Nvidia before delving into this other AI play that Jason is looking at now.
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Nvidia's stock price surged 450% from the beginning of 2020 to late 2021, peaking at around $345.
Then came the Great Tech Wipeout.
NVDA plunged 65% over the next 11 months, and bottomed last October around $120.
The stock hasn't clawed back to its 2021 high – at least, not yet. But as you saw in the chart shared earlier, shares have climbed past $300.
To be clear: Jason isn't predicting a crash, big losses, or any other causes for concern.
He's also not saying this is a time to sell.
But he does see some "warning lights" flashing – signals from his Quantum Edge trading system that there's a better opportunity among the 6,000 stocks that his system ranks and scores.
His system distills all that data down into one number – the Quantum Score – which helps him understand if a stock is a buy-it-now profit play, a go-along-for-the-ride hold, or a run-for-your-life avoid.
His system can identify winners over the very long term (as in several years out). But in this current investing environment filled with so much uncertainty, he can also use it to make money in the near term and take profits when it makes sense.
Here's what Jason found when he put NVDA under his "investment microscope" last week.
The Results Are In
Nvidia's overall Quantum Score is an excellent 77.6 (out of 100).
To arrive at that score, Jason's system analyzes a stock's fundamentals (the company's underlying financials) and its technicals (the price action).
Jason said Nvidia's Technical Score was a super strong 88.2, but there is some context that needs to be understood with that score. There are stocks, and then there are overheated stocks. And a near-perfect Technical Score close to the 90s can hint that a pullback is in the offing.
Then there's Nvidia's Fundamental Score, where there's a bit of a drop-off. The company rates a 62.5, which certainly isn't bad, but neither is it stellar.
Here's a sneak peek into how his system rates some of the chipmaker's underlying financials:
Overall, Jason says we have a solid picture, but there are a couple areas of potential concern (in the red).
One area of worry: debt, which is on the high side at 54.4% of equity. Through his analysis of 32 years' worth of data, Jason found that high debt loads can be a drag on stock prices. More importantly, when interest rates are rising, debt has to be refinanced at elevated levels – and the higher interest payments eat into profits.
That's partly why Jason prefers to see debt/equity levels of less than 50%. So Nvidia isn't outrageously high. But debt becomes more of an issue in conjunction with the next metric: valuation.
NVDA's forward P/E ratio (based on estimated earnings) has ballooned to 63.7. That means the stock is trading at 64 times its expected earnings per share. That high multiple isn't surprising, given the stock's huge move. Jason loves price momentum as much as anybody, but he says NVDA is now getting pretty rich. And at nearly 64, Nvidia's P/E ratio is 3.5 times the 18.2 multiple of the S&P 500.
Nvidia's shares are also getting expensive on the bases of both price/book value and price/tangible book value right now.
Add it all up and Jason says you have a great company with a history of supercharging shareholder portfolios...
But you also have a stock that may be offering more limited return potential – at least in the near term.
Trade-offs are a big part of any investment decision. When you put money into one stock, that means you're not putting that money into another stock.
Jason says that this is the dynamic at work here, as he's found a stronger investment opportunity.
He says that it has outperformed Nvidia over the last month, has a higher Quantum Score, an identical (and excellent) Technical Score, and a much higher Fundamental Score.
The company he believes is a better opportunity is Advanced Micro Devices Inc. (AMD).
Founded in 1969 in Silicon Valley, AMD produces processors, graphics hardware, and other software and tools for computing. AMD's products can be found in personal computers, gaming consoles, 3D printers, cars, and data centers.
Recognizing that high-performance computing will play an ever-larger role in the technology trends of tomorrow, AMD pulled off the largest deal in semiconductor history last year when it bought rival chip firm Xilinx for an estimated $49 billion. Xilinx offers a complementary collection of products that gives AMD "the industry's strongest portfolio of high-performance and adaptive computing products," AMD told investors when it finalized the buyout deal.
With the know-how and industry relationships provided by Xilinx, AMD will serve a broader market than ever. In fact, the acquisition expands the company's total addressable market from an estimated $80 billion to $135 billion.
As a competitor in the AI market, AMD has a powerful ally on its side: Microsoft Corp. (MSFT), which is reportedly helping AMD expand into artificial intelligence processors. With the backing of this tech behemoth, AMD will be better equipped to grow the AI side of its business.
Morgan Stanley analyst Joseph Moore originally estimated that AMD would bring in $100 million in AI revenue in 2024, but now he believes "the opportunity in formation is materially larger," bumping up his outlook to $400 million and noting that $1.2 billion is attainable in an optimal situation.
AMD's Quantum Score is outstanding at 86.2. That's the product of a Technical Score of 88.2 and a Fundamental Score of 83.4.
That technical score is really high. And if you recall, nearing 90 sometimes indicates a pullback is coming. Here, though, Jason views the score as less of a liability because of the stock's across-the-board strength.
AMD's exceptional Fundamental Score is much better than Nvidia's, which contributes to the higher Quantum Score and increases the odds of near-term profits. Adding to that is AMD's significantly lower debt (just 5.2% of equity), and a much-lower forward P/E ratio of 35.6.
AMD has gained nearly 15% since Jason added it to the Quantum Edge Trader portfolio less than two months ago. It's now trading above the "buy" point he shared with his subscribers, so you might want to avoid chasing it right now. But a pullback would present an attractive entry point.
As far as Nvidia goes, Jason says it's a terrific company and wants to reiterate he doesn't think this is a time to sell shares, as the company could have a strong earnings report tomorrow.
TradeSmith is not registered as an investment adviser and operates under the publishers' exemption of the Investment Advisers Act of 1940. The investments and strategies discussed in TradeSmith's content do not constitute personalized investment advice. Any trading or investment decisions you take are in reliance on your own analysis and judgment and not in reliance on TradeSmith. There are risks inherent in investing and past investment performance is not indicative of future results.
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