Last week, investors saw NVIDIA (NASDAQ:NVDA) stock soar after it beat earnings expectations and its CEO told investors about how much money the company would make from artificial intelligence (“AI”). On a call after the earnings release came out, CEO Jensen Huang mentioned the many opportunities AI would create for NVIDIA. NVIDIA’s chips are used in the servers that AI runs on, so there may be an opportunity for it to make money as ChatGPT-like apps become more popular.
Nevertheless, the AI opportunity is not worth an infinite price. NVIDIA rallied 15% the day its AI-fueled earnings release came out – it’s starting to get extremely expensive. There are other ways to get in on the AI opportunity without buying extremely expensive stocks. In this article, I’ll explore one Canadian stock that benefits from AI while being much less expensive than NVIDIA. First, though, let’s take a look at the reasons why NVIDIA rallied in the first place.
Why NVIDIA stock soared
The reasons NVIDIA stock soared last week were twofold:
- The company’s earnings slightly beat analysts’ expectations.
- The call after the earnings release came out mentioned a great opportunity from AI.
Most likely, it was the AI mentions on the earnings call that contributed to the rally the most. This year, we’ve seen many stocks, such as Microsoft, rally simply because they introduced AI services. Investors bought in despite there being no indication that these services would lead to profits. It’s clear that there is some “AI hype” circulating right now, leading to very impulsive stock purchases. This appears to have driven the gains in NVDIA, whose stock rallied 15% after its earnings fell 52%.
Why it’s likely very overvalued now
NVIDIA’s rally last week was all very exciting, but the uncomfortable truth is that NVIDIA is starting to look overvalued. At today’s prices, it trades at:
- 21.5 times sales.
- 133 times earnings.
- 26 times book value.
This is extremely expensive. If you aren’t familiar with the terms used above, they basically mean that when you buy NVIDIA, you’re paying for 21.5 years of sales, 133 years of profit, and 26 times more than the value of what the company owns. If its earnings don’t grow, NVIDIA will take over a century to earn in profit what its stock costs now! That’s an awfully long time to breakeven, and growth is never a sure thing.
A Canadian AI stock that’s much cheaper than NVDA
If you’re looking for a Canadian stock that benefits from the AI opportunity, you could consider Kinaxis (TSX:KXS). Kinaxis is a tech company that uses machine learning to help people identify risks and opportunities in their supply chains. The “supply chain” is the network of suppliers that gets products to the customers. KXS helps people identify risks and opportunities in this domain. For example, it uses AI to help people predict when customers are likely to buy a lot of product, so they can buy more inventory than usual at that time.
KXS is much cheaper than NVIDIA stock, trading at 9.2 times sales and 8.7 times book value. That’s expensive, but not “unbelievably” expensive like NVDA. Also, its earnings are going up this year, not going down. On the whole, it seems less risky than NVIDIA stock.
