The artificial intelligence (AI) boom triggered a 900% rally in Nvidia (NASDAQ:NVDA) stock, sending it past $1,000 per share. To make the stock more affordable, Nvidia announced a 1:10 stock split that reduced the share price to $100 and gave the stock more flexibility to trade. However, some investors are worried about buying Nvidia stock, which has surpassed the US$3 trillion market cap.
While Nvidia remains unbeatable and the most promising AI stock, you can diversify your AI portfolio with other promising AI stocks trading at a cheaper valuation than Nvidia.
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Determining the value of AI stocks
The value of a stock is determined by its earnings potential. However, for tech stocks, the valuation also depends on the sales growth as many companies reinvest their money in research and development.
You could also consider the book value of the share, which is the value of one share as stated in the balance sheet. Suppose a company raises equity capital by selling shares in the market at $100 per share. The $100 per share amount received at the time of the issue is adjusted for profits and losses accumulated over the years after the company sets aside money for reinvestment in future growth. The value arrived at is the book value per share.
I have compiled the valuation ratios of several promising AI stocks that are seeing the impact of AI on their revenue and profit.
| Stock Ticker | Stock Price on August 23 | Forward PE | P/S | P/BV | Market Cap |
| NVDA | $129.37 | 48.8 | 40.4 | 64.8 | $3.2 trillion |
| MSFT | $416.79 | 31.5 | 12.7 | 11.5 | $3.1 trillion |
| TSM | $171.28 | 25.9 | 11.6 | 7.4 | $767.4 billion |
| AVGO | $166.36 | 27.7 | 17.6 | 11.1 | $774.4 billion |
| AMD | $154.98 | 45.5 | 10.9 | 4.4 | $250.8 billion |
Nvidia’s valuation is the highest on all three parameters, hinting it is overvalued.
Choosing three AI stocks cheaper than Nvidia
AMD stock
My first preference would be Advanced Micro Devices (NASDAQ:AMD), which has a comprehensive portfolio of computing chips it is using to build an end-to-end AI infrastructure. Its portfolio comprises central processing units (CPUs) for pre-AI computing, graphics processing units (GPUs) for parallel computing power, and fixed programmable gate arrays (FPGAs) for accelerators. Demand for AI chips drove its data centre revenue up 115% year-over-year to US$2.8 billion and operating income up 405% to US$743 million in the second quarter.
Like Nvidia, AMD also has an asset-light model. It only designs chips and infrastructure and outsources the manufacturing to third-party manufacturers like TSMC (NYSE:TSM).
The AI boom has not yet ticked up AMD’s share price. Among the five AI stocks, it has the lowest price-to-sales (P/S) and price-to-book value (P/BV) ratio. Since it has started capitalizing on AI, it is time to buy the stock before it surges.
TSMC
My second preference is Taiwan Semiconductor Manufacturing Company. It manufactures AI chips designed by Nvidia and AMD, benefitting from their large order books. However, its profit margins are relatively lower as it spends on building advanced fabrication facilities and purchasing high-precision equipment. It bears the risk of factory outage and lower yields in the initial batches. However, volume orders bring in economies of scale.
TSM stock surged 108% in the AI boom (November 2022 to date). Among the five, TSM is trading at the second-lowest P/S and P/BV ratio after AMD. Its forward price-to-earnings ratio is the lowest because of its high production cost.
Broadcom stock
My third preference is Broadcom (NASDAQ:AVGO), which makes communications and networking equipment used to build 5G infrastructure. The company has invested US$3 billion to develop custom AI ASICs (application-specific integrated circuits). It sees a US$150 billion opportunity in AI chips. The AI boom is already reflected in its earnings through increasing demand for networking switches as companies upgrade to AI.
Broadcom has been improving its software offerings through acquisitions, the latest one being that of VMware. These acquisitions increase the cost and grow earnings at marginal rates. Among the five, Broadcom stock is trading at the third lowest forward price-to-earnings (P/E) and P/BV ratio.
