The technology sector is currently experiencing a renaissance as breakthroughs in artificial intelligence (AI) have attracted new investor interest.
Among the top AI opportunities is a small group of megacap tech companies called the “Big Seven.” Over the past year and a half, semiconductor companies Nvidia (NASDAQ: NVDA) has returned 628% – more than any other member of the Magnificent Seven.
Nvidia certainly has a big role to play in the AI ​​revolution, and its short-term prospects look very strong. But what about the long term?
Among the wonderful Seven, I saw Amazon (NASDAQ: AMZN) is a superior investment opportunity. Let’s take a look at why Nvidia is on the roll now, and assess the chipmaker’s long-term prospects against Amazon.
Nvidia is supercharged, but the competition remains
Generative AI applications, such as training large language models, machine learning, and faster computing, rely on several key components. That is, advanced semiconductor chips known as graphics processing units (GPUs), as well as data center network services, are integral to AI use cases.
Today, Nvidia sits comfortably at the intersection of GPUs and data center operations. Currently, the company is estimated to have 80% of the addressable market for AI chips.
This commanding leadership has translated into record revenue, margins, and cash flow.
The slope of the line in the graph above emphasizes Nvidia’s dominance. Demand for chips and enterprise data center services is strong, and provides a good price resource for Nvidia. But, Advanced Micro Devices and Intel developing alternative GPU suites.
Although neither company comes close to Nvidia’s current market share, the long-term secular tailwinds of AI suppliers suggest there may be an opportunity to catch up as Nvidia faces the challenge of matching customer demand trends with supply output.
Furthermore, Nvidia is not only facing competition from other chip businesses. Meta platform and Amazon are both working on internally developed chips in an effort to shift away from reliance on Nvidia.
Although I don’t see either company migrating away from Nvidia anytime soon, the long-term picture suggests that some of Nvidia’s key customers could be sources of less significant growth a few years from now.
Why I see Amazon as a better investment
Today, Amazon is famous for its e-commerce market and its cloud computing infrastructure – Amazon Web Services (AWS). However, Amazon has several other opportunities in its ecosystem, including streaming, shipping, and advertising.
This diversified business is what makes me most confident about Amazon’s long-term prospects, as the company has a unique opportunity to expand its reach by integrating AI into all of its operations.
One of the best moves Amazon has made is its $4 billion investment in AI startup Anthropic. Anthropic uses AWS as its primary cloud provider, and trains its generative AI models on Amazon’s homegrown chips.
In addition, Amazon also recently committed $11 billion to build a data center – a move that I see as a major validation that the company is serious about moving away from Nvidia in the long term.
While the long-term benefits of the project may come in the next year, I’m optimistic that Amazon is laying the groundwork for continued growth. Seen in a different way, while Nvidia now enjoys triple-digit revenue and profit growth, I doubt that the company can keep up such momentum. On the other hand, I think Amazon is just scratching the surface of a new wave of services driven by aggressive ambitions featuring AI.
Bottom line
When it comes to choosing between Nvidia and Amazon, I don’t think you can go wrong. Both companies operate from a position of strength, and each represents a compelling investment prospect.
With that said, Nvidia’s stock price has risen significantly over the past few years. As competition remains in data center services and AI-powered chips, I don’t see Nvidia keeping the lead. Ultimately, I think customers will expand their AI infrastructure and complement Nvidia’s existing services with other vendors.
In turn, this dynamic will lead to a decrease in revenue and profit for Nvidia in the coming years. In contrast, Amazon already has more than $50 billion in free cash flow and $84 billion in cash and equivalents on its balance sheet.
Amazon is in a very good place, financially, and has the flexibility to continue to improve its AI efforts. As a result, I think Amazon will eventually overtake Nvidia in terms of value as it grows into a more sophisticated company.
Considering the disparity between the multiples of the price, I will scoop up the shares of Amazon and plan to hold them for the long term. Nvidia trades at a real premium, suggesting some future growth could be priced into the stock. To me, Amazon’s position in the AI ​​realm is undervalued, and the stock looks cheap right now. I would encourage investors to take advantage of this discount and continue to monitor the company’s progress.
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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, former Facebook director of market development and spokesperson and sister of Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Adam Spatacco has positions in Amazon, Meta Platforms, and Nvidia. The Motley Fool has positions on and recommends Advanced Micro Devices, Amazon, Meta Platform, and Nvidia. The Motley Fool recommends Intel and recommends the following options: long January 2025 $45 calls on Intel and short May 2024 $47 calls on Intel. The Motley Fool has a disclosure policy.
Prediction: These “Magnificent Seven” Artificial Intelligence (AI) Stocks Could Be Better Investments Than Nvidia Over the Next 5 Years Published by The Motley Fool.
