Alphabet and Nvidia are competing in processing units.
Nvidia (NVDA +0.94%) and Alphabet (GOOG +3.74%) (GOOGL +3.95%) are two giants competing in the artificial intelligence build-out. For the most part, these two don’t compete against each other, and Alphabet is primarily a client of Nvidia’s. However, Alphabet has also built a graphics processing unit (GPU) alternative that competes with Nvidia’s product, although it’s serving a specific niche.
Of these two, which one is the better AI stock to buy now?
Image source: Getty Images.
Alphabet’s TPU is starting to challenge Nvidia’s GPU
Nvidia makes graphics processing units (GPUs), which have long been the go-to choice for computing problems that require massive horsepower. GPUs can process multiple calculations in parallel, making them a great option for arduous workloads like AI. GPUs are also great for other computing tasks, like cryptocurrency mining, drug discovery, engineering simulations, and their original use case, gaming graphics. However, when a GPU is only utilized for one specific workload for its entire life, the extra capacities that clients have to pay for are somewhat wasted.
Today’s Change
(0.94%) $1.77
Current Price
$189.67
Key Data Points
Market Cap
$4.6T
Day’s Range
$185.95 – $190.33
52wk Range
$86.62 – $212.19
Volume
5.8M
Avg Vol
174M
Gross Margin
70.05%
Dividend Yield
0.02%
That’s where a specialized unit like the Tensor Processing Unit (TPU) from Alphabet comes in.
Alphabet has spent the past decade developing the TPU in collaboration with Broadcom (AVGO 0.46%). Now, it has become a force in the AI computing world. TPUs aren’t suited for every AI task, but they can excel in some areas, which is why Alphabet also keeps its partnership with Nvidia and maintains access to the latest and greatest hardware from it.
Furthermore, a client likely won’t want to run all of their workloads on Alphabet TPUs. The only place to gain access to them is through Google Cloud, and if all of your workloads are run on Alphabet-specific hardware, then it becomes impossible to switch to a different provider if the price soars too much or there is some other reason you want to switch. Maintaining a balance between Nvidia’s GPUs and Alphabet’s TPUs is a smart move for many clients, and it bodes well for both companies.
Today’s Change
(3.95%) $11.96
Current Price
$314.81
Key Data Points
Market Cap
$3.8T
Day’s Range
$303.90 – $316.52
52wk Range
$140.53 – $349.00
Volume
2.2M
Avg Vol
37M
Gross Margin
59.68%
Dividend Yield
0.26%
While Nvidia has other use cases for its GPUs outside of AI, the reality is that the majority of Nvidia’s revenue is coming from this sector. Nobody knows what AI spending will look like five years from now, and this could become an issue for Nvidia if AI spending decreases.
Alphabet doesn’t have this problem. It has several other, non-AI businesses, like the Google search engine, YouTube, and its Google Cloud business. Google Cloud is Alphabet’s cloud computing wing, and will thrive even after the AI build-out is complete because clients will still be running AI workloads on its servers. This subscription platform is a perpetual cash cow for the business, and also benefits from non-AI workloads.
However, Nvidia is growing far faster than Alphabet.
Nvidia provides more upside
For their current fiscal years, Wall Street analysts expect Alphabet to grow its revenue at a 7% pace, while Nvidia grows at a 65% pace. That’s a massive mismatch in growth and shows how much Nvidia is thriving versus Alphabet. Still, Alphabet’s stock is more expensive from a forward earnings perspective.
GOOG PE Ratio (Forward) data by YCharts
As the chart indicates, this isn’t a common occurrence recently and should be taken as a strong buying sign for Nvidia stock. However, I’d bet Alphabet stock is far more steady over the next few years, while Nvidia’s is subject to the whims of the market’s capacity for AI risk.
I think both stocks are excellent to own, but Nvidia represents a stock that has much higher upside right now. Alphabet is still a solid pick and will be a steady grower, but its upside is fairly capped compared to Nvidia.
