Nvidia has been one of the best-performing stocks in the market since 2023. However, after the stellar run it has been on, some lofty expectations are built in. While Nvidia will likely hit these goals, investors may be better off looking at companies that don't have as high of expectations.
That's exactly what many billionaires have been doing in their hedge funds. Alphabet (GOOGL -0.83%) (GOOG -0.81%) was a popular purchase among some top hedge funds (and the billionaires that run them). In the first quarter, some that increased their Alphabet positions were Ray Dalio's Bridgewater Associates, Chase Coleman's Tiger Global Management, and George Soros' Soros Fund Management.
Although Nvidia is a strong artificial intelligence (AI) pick, Alphabet is also a fantastic investment.
Alphabet has multiple ways to benefit from AI
Alphabet has multiple ways to benefit from the rise of AI, but the avenue that will have the largest result is advertising. In Q1, more than three-quarters of Alphabet's revenue came from advertising. AI has already been used for some time in advertising, as it's used to pinpoint what type of ads will drive the highest return for Alphabet's customers.
Although it's becoming more mainstream, AI has been around for a while. However, the latest iteration of the technology, generative AI, has some useful features that allow people to use the technology without needing a programming background. One way Alphabet deployed generative AI into its platform is by integrating it into its compliance software, Performance Max (PMax). This is essentially a checklist for advertisers to ensure their ads have the best possible chance of succeeding. In the past, it used to take multiple iterations to construct an ad meeting all criteria. Now, Gemini (Alphabet's generative AI product) automatically writes ads that meet the criteria.
Alphabet's in-house generative AI platform, Gemini, has had its fair share of problems, but those are starting to get ironed out. Now that it is more accurate, customers can build their models on the Gemini platform. Alphabet will charge a fee to companies that do this, giving it another stream of cash.
Another avenue is Google Cloud. Running AI models takes serious computing power, and many companies either don't have it or can't justify spending millions of dollars on a system that may not be used enough to justify its cost. Cloud computing is the answer to this problem, allowing anyone to rent computing space from a cloud computing provider like Google Cloud.
Whether it's data storage or processing power, Google Cloud has clients covered. With access to the latest generation of Nvidia GPUs for training models, Google Cloud is a top competitor in this space.
Alphabet is set to benefit from the latest wave of AI, making it a must-own stock. It's also priced at a reasonable point.
The stock doesn't carry a massive price tag
Because many companies are experiencing massive changes and growth due to AI, it's smart to look at a company's forward price-to-earnings (P/E) ratio. Although it uses analyst projections to determine what a company's earnings may be over the next 12 months, which aren't perfect, it's still a good guide for investors.
Compared to Nvidia's 41 times earnings, Alphabet's stock is much cheaper.
GOOGL PE Ratio (Forward) data by YCharts
At 23 times forward earnings, Alphabet is a reasonably priced stock. Compared to the broader market's forward P/E of 21.5 (measured by the S&P 500), Alphabet doesn't hold much of a premium.
This is why Alphabet is such a better pick than Nvidia. It's reasonably priced, so any business gains will go toward increasing its stock price rather than meeting lofty expectations and reducing the premium investors have to pay for a stock.
These billionaires think Alphabet is a great buy right now. Long-term investors who want less risky exposure to AI should consider making Alphabet one of their top picks.
