Artificial intelligence (AI) hype picked up steam this week, as NVIDIA (NASDAQ:NVDA) stock beat earnings and rallied 30% after hours. The rally got started shortly after earnings came out and picked up the pace during the earnings call, which revealed guidance for $11 billion in second-quarter (Q2) earnings, when only $7.1 billion was expected. NVIDIA directly attributed its Q2 expectations to orders of AI chips. It also said that its data centre revenue grew 14% in Q1, owing largely to large orders of the company’s A100 AI graphics processing units.
In this article, I will explore the rapid rise in sentiment toward AI stocks and what it means for investors. I will explore NVDA’s recent earnings release and whether it foretells continued bullishness in AI. Finally, I’ll reveal a Canadian AI stock that is more modestly valued than NVIDIA today.
NVIDIA earnings summary
In its most recent quarter, NVIDIA delivered the following:
- $7.12 billion in revenue, down 13%
- $0.82 in GAAP earnings per share (EPS), up 28%
- $1.09 in adjusted EPS, down 20%
- Free cash flow of $2.64 billion, up 95.5%
- Guidance for $11 billion in Q2 earnings, which will be a 50% growth rate if it is achieved
Overall, it was a very impressive earnings release. The company’s negative growth in profit was reduced significantly; in fact, free cash flow actually grew significantly. The quarter was much better than expected.
Is it a buy?
Despite the impressive earnings release, I still wouldn’t buy NVDA stock, the reason being that it has gotten extremely expensive. Before the earnings release came out, the stock traded at 29 times sales, 92 times earnings, 34 times book value, and 134 times operating cash flow. It was already an expensive stock then. After NVIDIA’s earnings came out, the stock rallied, and reached a price-to-sales ratio well into the 30s. For a value investor like me, it’s just not the most compelling opportunity out there.
A more modestly valued Canadian stock
If you want to buy into AI but find NVIDIA too expensive, you could consider a stock like Kinaxis (TSX:KXS). Kinaxis is a Canadian AI company that develops supply chain management software. It has been in business for decades, building software that helps businesses forecast trends in sales and inventory, so they can better manage both. Kinaxis has been doing this for a long time, but now it’s using AI to make its supply chain management services even better.
With Kinaxis’s AI features, you can have a computer automatically look through your inventory and sales data to identify the times when customers are most likely to buy, and when inventory will be needed. This will help you stock just the right amount of inventory at the right times, so you’re neither left with product you can’t sell, nor left with too little to fulfill orders.
How is Kinaxis doing with its AI ventures?
It’s doing pretty well, it seems. In its most recent quarter, it grew its revenue by 3%, and its SaaS revenue by 28%. 3% sales growth might not seem like much, but remember that NVIDIA rallied 30% after hours when its revenue declined year over year! Kinaxis, at least, has positive top-line growth and guided for $425 million in 2023 revenue, which would be 16% growth over 2022. Overall, it’s a pretty compelling picture.