Nvidia(NASDAQ: NVDA) has undoubtedly been the poster child of the artificial intelligence (AI) boom. This is evidenced by its share price, which absolutely skyrocketed, rising 1,800% in the past five years. Today, Nvidia is the second most valuable enterprise on Earth.
Investors who want exposure in their portfolios to the AI trend probably have Nvidia at the top of their watch lists. However, it can be disconcerting knowing that you missed out on tremendous past gains. Maybe this is a sign that it's time to look elsewhere.
Should you forget Nvidia and buy these two AI stocks instead?
In an advantageous position
Investors should take a closer look at Alphabet(NASDAQ: GOOGL)(NASDAQ: GOOG) and Meta Platforms(NASDAQ: META). They own some of the world's most powerful internet properties, like Google Search, YouTube, Android, Google Cloud, Facebook, Instagram, and WhatsApp. There are billions of users on these platforms each day.
Alphabet and Meta are uniquely positioned in the AI wars. They have a massive number of users and ad customers to whom they can introduce new AI features with instant adoption. This means rapid feedback that can inform product iterations.
What's more, the success of various initiatives, like AI tools offered within the Google Cloud platform, AI responses in Google Search, or the Meta AI assistant, indicate a strategy that's working to improve utility for customers. They also have virtually unlimited data at their disposal to train their large language models.
These companies are also in strong financial shape. They are extremely profitable, giving them the ability to invest aggressively. Alphabet plans to spend $75 billion on capital expenditures this year, while Meta estimates over $60 billion. This money will support expanding technical and networking infrastructure to bolster AI capabilities.
Finding value in AI
There's been so much attention, excitement, and capital directed toward the AI race. As it's been more than two years since the launch of ChatGPT, I think it's safe to say that this revolutionary technology isn't going away anytime soon. The issue, however, is that investors might struggle to find value when putting money to work.
Again, here's where Alphabet and Meta shine. Their valuations aren't unreasonable. Alphabet and Meta trade at price-to-earnings (P/E) ratios of 22 and 29. This makes them the two cheapest stocks of the exclusive "Magnificent Seven" group.
Nvidia's red flags
I believe it's worth discussing why investors should pass on Nvidia right now. The valuation is one area that might cause some hesitation. As of this writing, shares trade at a P/E ratio of 53. This represents a substantial premium to both Alphabet and Meta.
To be fair, though, Nvidia's impressive earnings trajectory might justify paying that valuation, which looks cheaper the further you extend the time horizon. But I don't think investors should ignore some red flags that challenge the company's rosy outlook.
For starters, it faces extreme customer concentration. So-called hyperscalers like Alphabet, Meta, Microsoft, and Amazon are believed to be the top buyers of Nvidia chips. This setup has worked beautifully for Nvidia due to unbelievable demand, but it adds tremendous risk if an account lowers orders or drops off altogether one day.
This is precisely what could happen in the future. Although they are currently spending lots of money with Nvidia, these tech giants are all developing their own graphics-processing units. Successfully integrating upstream would result in less dependence on Nvidia over time.
I'll also point to a drastic scenario that could happen in an economic downturn. Should there be a recession that restricts the flow of capital, hurts the confidence of corporate executives, or leads to high unemployment, there could be a sharp decline in tech spending, especially since the return on these massive investments is still uncertain.
Nvidia's rise has been spectacular, but perhaps it's time to consider buying Alphabet and Meta to gain exposure to the AI trend.
Should you invest $1,000 in Nvidia right now?
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Neil Patel has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, Meta Platforms, Microsoft, and Nvidia. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
