The impressive rally in tech stocks this year can be majorly attributed to optimism surrounding the artificial intelligence (AI) space. For instance, shares of Nvidia (NASDAQ: NVDA) have almost tripled year to date, valuing the semiconductor giant at a market cap of around US$1 trillion.
Investors are bullish on NVDA stock, as its data centres will be used to power a wide range of AI-based applications. But here’s why I think Nvidia shares are overpriced.
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Is Nvidia stock a buy or a sell?
The S&P 500 index has surged 15% in the first six months of 2023. This uptick has been driven by the top 10 holdings of the index, which have an average forward price-to-earnings multiple of 28.5 times. Comparatively, NVDA stock is priced at 52.4 times forward earnings, which is quite steep.
Analysts also expect the company to increase sales by 58.6% year over year to US$42.8 billion in fiscal 2024, indicating a forward price-to-sales ratio of 23.4 times. Analysts, however, remain bullish on NVDA stock and expect shares to surge another 15% in the next year.
But investors should understand that investing in megatrends carries significant risks. In the last two decades, investors have lost billions of dollars by investing in companies part of the dot-com bubble as well as in sectors such as cannabis, plant-based meat, and collaboration.
So, there is a good chance for Nvidia shares to correct from its current price, despite its stellar growth forecasts.
A TSX AI stock to buy instead of NVDA
While Nvidia is expensive, there is one TSX stock you can scoop up at a discount. Shares of Dye & Durham (TSX: DND) are trading 66% below all-time highs, valuing it a market cap of $975 million.
Dye & Durham provides legal software as well as data and payments technology solutions that aim to improve efficiency and productivity for legal and business professionals. In recent years, the company has successfully allocated capital toward acquisitions, allowing it to accelerate top-line growth at a rapid pace.
Dye & Durham has acquired 11 companies in the last two years and increased sales from $65.5 million in fiscal 2020 to $475 million in fiscal 2022 (ended in June). So, DND stock is priced at two times forward sales, which is very cheap.
Dye & Durham provides top-tier, AI-powered practice management solutions while delivering crucial data insights to companies. It also supports critical corporate transactions and has onboarded 50,000 clients across Canada, Australia, the U.K., and Ireland.
In the fiscal third quarter of 2023, Dye & Durham’s contracted annual recurring revenue accounted for 18% of total sales, up from 9% in the year-ago period, enabling the company to reduce exposure to depressed real estate transaction levels.
To improve profit margins, DND reduced its cost base by 19% or $42 million on an annualized basis, which was much higher than its initial forecast of 10%.
Analysts expect Dye & Durham to end fiscal 2024 with $484 million in sales, an increase of 8% year over year. Its stock price is also forecast to increase by 40% in the next 12 months.
