NVIDIA (NASDAQ: NVDA) stock is one of the hottest items on the global stock exchanges in 2024. Up 84% for the year, it has easily outperformed the S&P 500, NASDAQ-100, and TSX. It all got started back in May 2023, when the company put out an earnings release that easily beat analysts’ expectations. The release specifically included guidance – that is, a forecast of the next quarter’s performance – of $11 billion, 57% higher than was previously expected. The stock rallied impressively the day earnings came out. Since then, it has risen another 208%.
It’s been an incredible thing to watch, but the end result has been NVIDIA becoming a very pricey stock. It trades at 74 times last year’s earnings, and 36 times the best estimate of next year’s earnings. In this article, I will explore three AI stocks that are cheaper than NVDA.
Taiwan Semiconductor
Taiwan Semiconductor Manufacturing (NYSE: TSM), or ‘TSMC’ for short, is a Taiwanese chip manufacturer. The chip foundry is the contract manufacturer for NVIDIA. It also does orders for most chip designers and tech companies that make their own chips (e.g., Apple).
TSMC is best known for being the world’s biggest “pure play” chip manufacturing company. It does not design any chips of its own, instead specializing in building other companies’ designs. Its main competitors in chip manufacturing are not pure plays; that is to say, they do design as well as manufacturing. So, they aren’t as focused on manufacturing as TSMC is. The end result is that TSMC is the go-to company for large, complex orders such as NVIDIA’s AI accelerator chips.
Despite all of these advantages, TSMC stock is fairly cheap. Trading at 26 times last year’s earnings and 21.8 times the best estimate of next year’s earnings, it is about as cheap as you’ll get with AI stocks. Though the next two on this list are among a small handful that beat it on valuation.
Open Text
Open Text Corp (TSX: OTEX) is a Canadian software company that develops text analysis and content management software. As far as AI stocks go, this is likely the very cheapest of the bunch, trading at 9.9 times earnings and 8.3 times the best estimate of next year’s earnings.
Historically, the company’s earnings and free cash flow have not increased very much: both metrics are down over 1-, 5-, and 10-year timeframes. However, the demand for AI-powered services this year ramped up interest in OTEX’s products, which help businesses extract ideas from text, manage content, and create AI-powered content. These use-cases are quite similar to the generative AI that ChatGPT itself is built on, known as large language models (LLMs). This similarity to ChatGPT seems to have driven interest in OTEX’s services among enterprise clients, who are eager to incorporate LLMs in novel and proprietary ways. It has not led to much of a stock price increase, though: OTEX is only up 2.5% over the last year. As a result, it is among the cheapest AI stocks out there.
Brookfield Infrastructure Partners
Brookfield Infrastructure Partners (TSX: BIP.UN) is a Canadian infrastructure investor that is jumping on the AI bandwagon by investing in data centres. I don’t want to push the AI connection too far here: the overwhelming majority of the company’s money is invested in opportunities that have nothing to do with AI. Nevertheless, it is an investment company that is getting some exposure to AI by way of data centre investments.
The way Brookfield plays AI is it invests in data centres, which contain servers that can be used to run AI applications. The company is also investing in AI-powered phone calls, which are useful in customer service. Overall, Brookfield Infrastructure Partners is a well-rounded financial stock, that also has an AI angle to it. Worth considering if you prefer Canadian financials to pricey tech stocks, but don’t want to miss out on AI.
