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Considering Switching Your Investment to Two Alternative Artificial Intelligence (AI) Stocks Instead of Nvidia?
Nvidia's (NVDA 4.36%) stock has witnessed an astronomical increase of approximately 27,340% over the past decade, driven mainly by its prosperous data center business that sells high-end GPUs for processing intricate artificial intelligence (AI) tasks. This sector has significantly contributed to its growth, making Nvidia a crucial player and indicator of the flourishing AI market.
The market's appetite for Nvidia's data center GPUs continues to outpace its production as more organizations upgrade their servers to accommodate the latest AI applications. In fiscal 2024, Nvidia saw a revenue surge of 126% and analysts anticipate a compound annual growth rate (CAGR) of 57% from 2024 to 2027, propelled by rising earnings per share (EPS) at a CAGR of 345%.
Despite the optimistic outlook, Nvidia's stock seems relatively reasonable at 31 times next year's earnings, despite potential hindrances like competition from cheaper chipmakers, the development of first-party AI accelerator chips, tighter US export curbs against Chinese companies, and the ongoing antitrust probe in China.
While Nvidia remains a promising investment in the AI market, investors should be mindful of these risks and explore other potential alternatives. This brings us to two contenders, Innodata (INOD 7.92%) and Taiwan Semiconductor Manufacturing (TSM 2.87%).
A high-growth small-cap stock: Innodata
Innodata's journey began in 1993 as a slow-growth IT services and software company. However, its stock saw a drastic transformation after its IPO, leaping from around $1 at the end of 2019 to nearly $35 as of now. This surge was primarily due to its new generative AI training services for the "Magnificent Seven" companies.
For many years, Innodata mainly focused on providing business process, technology, and consulting services to sectors such as government, aerospace, defense, financial services, and tech. Despite reporting moderate revenue growth at a CAGR of 6% from 1994 to 2019, Innodata struggled to compete with larger companies like IBM and Microsoft.
However, Innodata managed to capitalize on market inefficiencies in recent years by providing a suite of task-specific microservices for preparing custom data for AI applications in 2018. From 2019 to 2023, Innodata's revenue grew at a CAGR of 12% in response to the expanding demand for its AI training services. Analysts predict that this growth trend will continue, with Innodata's revenue rising at a CAGR of 42% from 2023 to 2026 as it strengthens its relationship with its Magnificent Seven clients and expands its client base. Innodata is also forecasted to turn profitable in 2024 and record a CAGR of 21% for its EPS over the subsequent two years.
Innodata's strong growth potential is further emphasized by its current enterprise value of $1 billion, which appears reasonably valued at 45 times forward earnings and five times next year's sales. This suggests that Innodata may have ample room for further gains.
The backbone of the AI market's expansion: Taiwan Semiconductor Manufacturing
Nvidia's chip production wouldn't be possible without Taiwan Semiconductor Manufacturing (TSM), the world's largest and most technologically advanced contract chipmaker. TSMC's foundries are essential for producing the smallest, densest, and most power-efficient chips for fabless chipmakers like Nvidia, AMD, Qualcomm, and Apple. As a result, TSMC serves as the cornerstone of the semiconductor sector.
Thanks to Nvidia's brisk sales of AI chips, TSMC's high-performance computing (HPC) market has experienced strong growth, accounting for 51% of its third-quarter 2024 revenue. Its revenue is expected to increase by nearly 30% for the entire year, as the PC and smartphone markets stabilize and the AI market expands. TSMC's growth prospects are bolstered by Intel's recent foundry struggles, which may encourage more fabricless chipmakers to strengthen their relationships with TSMC.
In 2025, TSMC intends to bolster its dominance over Intel and Samsung by accelerating its production of advanced 2-nanometer chips. Analysts anticipate that TSMC's revenue and EPS will grow at a CAGR of 25% and 29%, respectively, from 2023 to 2026.
At its current valuation of 18 times next year's earnings, TSMC appears to be a bargain, despite potential challenges such as export curbs against China and geopolitical tensions surrounding Taiwan. TSMC represents an attractive opportunity to profit from the expansion of the AI and semiconductor markets.
Instead of Nvidia, Innodata might draw in more speculative growth investors, while TSMC could be a more cautious investment in the flourishing AI market. I wouldn't categorize either stock as a total substitute for Nvidia in an AI-focused portfolio – as Nvidia continues to offer top-notch tools for the AI gold rush – but they could enhance its growth and provide various ways to diversify your AI holdings beyond Nvidia.
Investors interested in the AI market might also consider Innodata, whose stock has seen significant growth due to its new AI training services for major companies, with a current valuation of 45 times forward earnings and five times next year's sales, suggesting potential for further gains.
Moreover, Taiwan Semiconductor Manufacturing (TSM) is an essential player in the AI market, producing the smallest, densest, and most power-efficient chips for numerous fabless chipmakers, including Nvidia. TSMC's revenue is expected to grow at a CAGR of 25% from 2023 to 2026, making it a more cautious but attractive investment in the expanding AI and semiconductor markets.