Nvidia (NASDAQ: NVDA) seems well on its way to end another year with stunning gains. Shares of the semiconductor giant have shot up more than 150% so far in 2024 after a stellar performance last year, and there is a good chance that it can continue to fly higher.
After all, Nvidia management points out that the demand for its artificial intelligence (AI) chips continues to remain solid, with its upcoming Blackwell processors experiencing stronger demand than supply going into 2025. So, it won't be surprising to see Nvidia delivering phenomenal growth in revenue and earnings next year as well, and that could lead to more stock market upside.
However, certain investors may be looking for alternatives to capitalize on the AI boom because of Nvidia's valuation. The stock's earnings multiple of 59 is well ahead of the Nasdaq-100 index's earnings multiple of 32. Though Nvidia's healthy revenue and earnings growth can help justify its valuation, investors with a lower risk appetite may want to look at cheaper options.
Here are two names that look like ideal alternatives to Nvidia stock.
1. Micron Technology
Micron Technology (NASDAQ: MU) is a manufacturer of memory chips and counts the likes of Nvidia among its customers. As the demand for Nvidia's AI graphics processing units (GPUs) has boomed, Micron has also witnessed robust growth in sales of its high-bandwidth memory (HBM) chips that are used in these GPUs.
This is the reason why Micron Technology's revenue for the fourth quarter of fiscal 2024 (which ended Aug. 29) increased a whopping 93% year over year to $7.75 billion. The chipmaker also posted a non-GAAP (adjusted) profit of $1.18 per share as compared to a loss of $1.07 per share in the same quarter last year.
More importantly, Micron expects revenue of $8.7 billion for the current quarter, which would be a jump of 84% from the same period last year. For comparison, Nvidia expects 80% year-over-year revenue growth in the current quarter. Of course, Nvidia has a much larger revenue base than Micron, as its revenue in the previous quarter shot up 122% year over year to $30 billion, but investors should note that they can buy Micron at a much cheaper valuation.
This is evident in the chart below:
NVDA PS Ratio data by YCharts
Additionally, Micron's AI-related opportunity is more than just memory used in data centers. The company is also on track to benefit from the increasing integration of generative AI features in smartphones and personal computers. On its latest earnings conference call, Micron management pointed out that AI-enabled smartphones are carrying 12 gigabytes (GB) to 16GB of dynamic random access memory (DRAM) as compared to the 8GB DRAM available in flagship smartphones last year.
On the most recent earnings call, Micron CEO Sanjay Mehrotra cited a similar development in the PC market: "As an example, leading PC [original equipment manufacturers] have recently announced AI-enabled PCs with a minimum of 16GB of DRAM for the value segment and between 32GB to 64GB for the mid and premium segments, versus an average content across all PCs of around 12GB last year."
It is worth noting that both of these markets are on track to witness huge growth in shipments because of generative AI. In smartphones, generative AI-enabled devices are expected to clock an annual growth rate of 78% through 2028, according to IDC. Meanwhile, shipments of AI PCs are forecast to grow at an annual pace of 44% between 2024 and 2028, according to Canalys.
And finally, Micron estimates that the size of the HBM market could jump from $4 billion in 2023 to $25 billion in 2025. In all, Micron has multiple lucrative growth drivers thanks to AI, which explains why its bottom line is forecast to take off remarkably from fiscal 2024's reading of $1.30 per share over the next couple of years.
MU EPS Estimates for Current Fiscal Year data by YCharts
As such, Micron looks like a solid bet for investors looking to make the most of the growth in the AI semiconductor market but are wary of buying Nvidia right now because of its expensive valuation.
2. Taiwan Semiconductor Manufacturing
Taiwan Semiconductor Manufacturing (NYSE: TSM) , popularly known as TSMC, is the world's largest foundry that manufactures chips for major chipmakers and consumer electronics companies, including Nvidia. In fact, TSMC has played a central role in Nvidia's success in the AI chip market thanks to TSMC's advanced process nodes that have allowed it to produce fast and power-efficient chips.
For instance, Nvidia's A100 GPU, which was used for training ChatGPT, was fabricated using TSMC's 7-nanometer (nm) process. That was followed by the hugely popular H100 processor, manufactured using a more advanced 4nm process from TSMC. It is worth noting that the demand for TSMC's process nodes is so strong that its packaging capacity of advanced chips is booked out for 2025, thanks to Nvidia and AMD , which will be using TSMC's lines to manufacture AI processors.
Not surprisingly, TSMC is now working to expand its output. The company is expected to end 2024 with an advanced chip packaging capacity of 45,000 to 50,000 units per month, which would be a significant increase over its 2023 monthly packaging capacity of 15,000 units. This should allow TSMC to fulfill more orders from AI chipmakers and other key clients such as Apple , and that's probably the reason why there has been a nice increase in TSMC's earnings projections for the next couple of years.
TSM EPS Estimates for Current Fiscal Year data by YCharts
The chart above tells us that TSMC's earnings are on track to increase by more than 20% in both 2025 and 2026, following this year's projected jump of 27% from last year's reading of $5.19 per share. Given that TSMC stock is now trading at 22 times forward earnings (a big discount to the U.S. tech sector's average earnings multiple of 45), investors are getting a good deal on this AI stock considering the potential upside it may be able to deliver.
Assuming TSMC's earnings indeed hit $10.35 per share in 2026, and it trades at 30 times forward earnings at that time (in line with the Nasdaq-100 index's forward earnings multiple), the chip giant's stock price could hit $310. That would be a 72% increase from current levels, giving investors a solid reason to buy this stock while it is trading at an attractive valuation.
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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Apple, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy .
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