Everybody knows that Nvidia(NASDAQ: NVDA) dominates the artificial intelligence (AI) processor market. AI software experts need extremely powerful number-crunching chips, and Nvidia's AI accelerators are the cream of the crop.
But Nvidia's share prices have skyrocketed 1,060% in two years and the stock trades at a nosebleed-inducing 37 times trailing sales. Is this stock overpriced, or is it still the best AI stock to buy today?
Let's have a look.
Nvidia's stellar AI performance
Nvidia has been selling AI accelerators for years. OpenAI and Microsoft(NASDAQ: MSFT) bought the chips that made the first public version of ChatGPT possible in 2020. That system was worth a few hundred million dollars. Rumor has it that the next generation of OpenAI's ChatGPT training hardware will require millions of Nvidia chips and cost as much as $100 billion.
And that's just one system from one AI project. The ChatGPT release opened the floodgates for an industrywide fascination with generative AI, and pretty much every tech giant worth the nickname is building large AI-training systems. Nvidia's revenue chart shows where the generative AI boom started to translate into soaring chip sales, about two quarters later:
NVDA Revenue (TTM) Chart
As you can see, Nvidia's business is booming and the company converts nearly half of the incoming revenues into free cash flows. Nvidia obviously deserves a premium-priced stock, given its shareholder-friendly financial results and solid prospects of continued top-line growth.
The AI king has many serious rivals
On the other hand, Nvidia isn't the only AI accelerator designer out there. The company wins the raw performance races every time but others offer competitive chips with other desirable features. For example:
The Instinct product line from arch-rival AMD(NASDAQ: AMD) reportedly uses faster memory than Nvidia's best AI accelerators but at the cost of higher power consumption.
Intel's (NASDAQ: INTC) Gaudi accelerators come with much lower up-front hardware costs, resulting in a better bang-for-your-buck calculation. Moreover, Intel runs its own chip-making facilities, avoiding bottlenecks in the fab-less semiconductor model where many processor designers compete for a limited supply of manufacturing services.
Other challengers might focus on faster networking, broader use cases, or higher performance with a smaller instruction set.
And some of the largest names in cloud computing have designed their own AI accelerators, hoping to cut costs by leaving Nvidia's profits out of the hardware design.
Nvidia will probably lose some system-building contracts to one or more of its highly qualified competitors over time. It might already be happening behind closed contract-wrangling doors. Market makers will not be kind to the soaring stock if and when those headlines start to pop up. This risk looms larger every time Nvidia makes a minor misstep, such as the overheating issues with the next-generation Blackwell processor and a strained relationship with leading chip maker Taiwan Semiconductor Manufacturing(NYSE: TSM).
In other words, ultra-bullish Nvidia investors may have overestimated the company's long-term role in the AI market.
Take it easy with this risky AI stock
I'm not saying that you should sell all your Nvidia stock today and never look back. Far from it. The roaring financials should support a lofty stock price for now, with the caveat that negative news could unleash a dramatic price correction. And it's not easy to push an established market leader out of the pole position, especially in the computing sector. AI developers are getting used to Nvidia's design choices and programming quirks, giving the company a leg up on current and future challengers.
All things considered, you should consider locking in some of your Nvidia profits by selling a few shares at a sky-high price. I cut my Nvidia holdings in half 8 months ago and have been sleeping more soundly since making that move.
Should you invest $1,000 in Nvidia right now?
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Anders Bylund has positions in Intel and Nvidia. The Motley Fool has positions in and recommends Advanced Micro Devices, Microsoft, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Intel and recommends the following options: long January 2026 $395 calls on Microsoft, short January 2026 $405 calls on Microsoft, and short November 2024 $24 calls on Intel. The Motley Fool has a disclosure policy.
