Is the AI rally over for Nvidia (NASDAQ:NVDA)? The dominant AI chipmaker has fallen 10% from its all-time high and has now slipped back to the third most valuable stock on the market behind Microsoft (NASDAQ:MSFT) and Apple (NASDAQ:AAPL).
Investors, though, should probably just view it as the pause that refreshes. Nvidia stock is just taking a breather before its next run higher. With CEO Jensen Huang declaring “we are at the beginning of a new industrial revolution” due to corporate demand for AI, there will be no let up in Nvidia’s growth potential.
Yet, because the stock still trades at 71 times trailing earnings, 33 times next year’s estimates and 37 times sales, Nvidia is not cheap. If you missed the run-up in the chipmaker’s stock (sheepishly raises hand), don’t worry. There are still other AI stocks to buy instead of Nvidia that can generate outsized returns for your portfolio.
That is why you just might want to double down on three stocks below. They might not generate 3,000% returns in five years as NVDA stock did but that doesn’t mean you can create fabulous wealth with these AI stocks today.
Advanced Micro Devices (AMD)
The first choice for any investor looking for AI stocks to buy instead of Nvidia would have to be Advanced Micro Devices (NASDAQ:AMD). It is the one chipmaker perfectly positioned to challenge the industry leader, and in many respects is already doing so.
In just the two months since AMD released its AI-driven MI300X accelerator for data centers, the chipmaker already generated some $1.5 billion in sales. That’s not Nvidia-level revenue but AMD is only just getting started. Data center revenue surged 80% in the first quarter, jumping to $2.3 billion from the year-ago period causing segment operating profits to more than triple to $541 million.
And not content to rest on its laurels, Advanced Micro already has the next iteration of the accelerator ready to go. In the fourth quarter the chipmaker will release the Instinct MI325X accelerator that will take its AI capabilities to the next level.
A lot of AMD’s growth will occur in the back half of the year. The semiconductor stock forecasts data center revenue will exceed $4 billion in 2024, up from its previous guidance of $3.5 billion. And the company is stealing market share from both Nvidia and Intel (NASDAQ:INTC). It owns one-third of the market and it is quickly padding its share.
Expect Advanced Micro Devices stock to accelerate growth later this year and then continue a meteoric rise thereafter.
Taiwan Semiconductor Manufacturing (TSM)
The reason Taiwan Semiconductor Manufacturing (NYSE:TSM) is the second AI stock to buy instead of Nvidia is because it is the chip foundry from where Nvidia gets its chips. If there is any company that will grow alongside the AI chip stock best it is TSM.
Moreover, all the leading AI semiconductor manufacturers get their chips from Taiwan Semi, including Advanced Micro and Intel. The company has so much demand for its services that it can’t keep up with it and has had to expand manufacturing capacity. There are three new chip facilities planned to come online in the U.S. over the next few years.
I’ve always liked picks-and-shovels-type investments. They are the behind-the-scenes stocks that allow you to avoid trying to pick the winners and losers. They are willing to sell to anyone wanting to pan for gold, so whichever stock emerges victorious they benefit from it and the others. Taiwan Semiconductor Manufacturing is just such a play, though arguably not in the same sense as most people think of these stocks.
First-quarter revenue jumped 13% to $18.9 billion with rich profit margins across the board. Gross margins were 53%, operating margins were 42.1% and net margins came in at 38%.
The stock has doubled in value over the past year. Yet as AI demand maintains it white-hot pace look for TSM to achieve a trillion-dollar valuation of its own.
VanEck Semiconductor ETF (SMH)
I tend to not invest in exchange-traded funds (ETF) but in the same vein as Taiwan Semi is a picks-and-shovels stock on the AI chip trade, VanEck Semiconductor ETF (NYSEARCA:SMH) is a top AI stock to buy instead of Nvidia. Or rather, you will be buying Nvidia and all the other AI chip stocks out there.
With ETFs, of course, you’re buying a basket of companies. Just like TSM, you’re not trying to pick winners and losers but buying all the players (generally speaking). It doesn’t matter who wins because there will be many winners and VanEck Semiconductor will likely hold them all.
Not surprisingly, Nvidia is SMH’s largest holding, comprising 19.4% of the portfolio. The next biggest is TSM at 12.8% but it also owns hard-charging Broadcom (NASDAQ:AVGO) (7.9%), Advanced Micro (5.2%) and clean equipment manufacturer ASML Holding (NASDAQ:ASML) (4.8%).
In reality, any of those stocks would be a good AI stock to buy instead of Nvidia. But why worry that one will stumble? Just buy them up all at once with VanEck Semi. It has a relatively low expense ratio of 0.43% and has generated returns this year exceeding 48%. A $1,000 investment three years ago would be worth over $2,060 today, and would have been achieved at lower risk.
On the date of publication, Rich Duprey did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.