Nvidia vs. Meta: Which AI Stock Is a Smarter Investment?

Key Points

• Nvidia and Meta are both positioned to benefit from emerging AI technologies.
• Nvidia has the potential to overcome its recent cyclical slowdown in the near future.
• The core advertising business of Meta may encounter challenges.

As the field of artificial intelligence continues to grow at a rapid pace, investors are looking for the best AI stocks to add to their portfolio. Two companies that frequently come up in this conversation are Nvidia and Meta Platforms. While both companies have a significant stake in the AI market, they also have their own unique strengths and challenges. In this article, we’ll take a closer look at Nvidia and Meta and explore which one could be the smarter investment for those looking to invest in the AI space. We’ll examine their respective positions in the market, evaluate their potential for future growth, and consider any challenges they may face. So, let’s dive in and find out which AI stock is the smarter investment: Nvidia or Meta Platforms.

The competition between tech giants Nvidia and Meta Platforms is heating up, and investors are eager to know which company is poised to generate bigger gains this year. Both companies are well-positioned to profit from the expanding AI market, with many large tech companies, including Meta, installing Nvidia’s powerful graphics processing units (GPUs) in their data centers to tackle complex machine learning and AI tasks.

Nvidia’s GPUs enable Meta to develop targeted ads, language learning tools, and content moderation systems, while other businesses use them for automation, data analysis, and informed decision-making. Nvidia’s A100 chip also powers cutting-edge “generative AI” platforms like ChatGPT, Bing AI, and Stable Diffusion that generate fresh content based on existing data.

Despite taking a hit in 2022 due to rising interest rates and broader tech sector challenges, Nvidia and Meta have made strong comebacks in 2023, surging roughly 60% and 40%, respectively. The renewed interest in AI-related stocks, driven by the growth of ChatGPT and other AI services, is a major factor in this uptrend. As a result, investors are keen to know whether Nvidia or Meta is a smarter investment choice right now.

Nvidia Stock: Navigating the Cyclical Slowdown

Nvidia’s growth experienced a massive boost during the pandemic as the demand for gaming, remote work, and cloud-based services surged. The chipmaker’s revenue and adjusted earnings per share (EPS) soared by 61% and 78%, respectively, in fiscal 2022, which ended in January 2022. However, Nvidia’s growth momentum came to a halt as the tailwinds of the pandemic slowly dissipated, resulting in a cyclical slowdown for the company. Sales of new PCs dwindled as lockdowns ended, and macroeconomic headwinds forced companies to curtail their spending on big cloud and data center deals. The collapse of the cryptocurrency market further exacerbated the situation as miners flooded the market with used GPUs.

As a result, Nvidia’s revenue remained flat in fiscal 2023, while its adjusted EPS declined by 25%. In the third and fourth quarters, the company experienced a year-over-year decline in revenue, and it anticipates another decline in the first quarter of fiscal 2024. Despite this, Nvidia’s gaming and data center businesses, which together account for 90% of its revenue, are stabilizing on a sequential basis. The company expects the gaming business to stabilize as it resolves inventory issues and the Chinese market recovers. Additionally, the rise of generative AI services is expected to boost sales of Nvidia’s data center chips. Analysts predict that the company’s revenue and adjusted EPS will increase by 10% and 33%, respectively, for the full year, as the cyclical decline comes to an end.

Meta faces tough challenges in the wake of a difficult year.

In 2022, the social media giant’s growth was impeded by four major factors. Apple’s privacy changes on iOS enabled users to opt out of data-tracking features, making it difficult for Facebook and Instagram to target ads. Meanwhile, intense competition from ByteDance’s TikTok further reduced its ad sales and forced it to invest more heavily in its Reels short videos, which are less profitable than its News Feed ads. Additionally, the macroeconomic climate led to reduced ad spending, affecting Meta and other ad-dependent companies. Finally, Meta’s continued investment in its money-losing Reality Labs business, which posted an operating loss of $13.7 billion in 2022 while generating only $2.2 billion in revenue, dragged down the company’s overall performance.

As a result, Meta’s revenue and EPS declined by 1% and 38%, respectively, in 2022. However, analysts predict that the company’s revenue and EPS will increase by 5% and 11%, respectively, in 2023 as its advertising business stabilizes and it reins in spending to offset the persistent losses from its Reality Labs segment. The company has already laid off 13% of its workforce and is reportedly planning another round of layoffs this year. As Meta streamlines its business, it will focus on improving its first-party data capabilities to counter Apple’s platform changes and expanding Reels to compete with TikTok. Investors looking to invest in Meta stock should keep an eye on the company’s progress in these areas.

The verdict on Nvidia and Meta’s stock

Nvidia has a higher forward P/E ratio of 49 compared to Meta’s lower forward P/E ratio of 18. While Nvidia is still trading at a premium to many of its peers, it has a clear path toward a long-term recovery. On the other hand, Meta faces more significant challenges with Apple, ByteDance, and its Reality Labs business, which could hamper its growth in the long term. Despite this, Meta’s lower valuation makes it a more compelling buy right now, as its advertising business stabilizes, and it reinvents itself. In contrast, Nvidia’s long-term prospects remain bright, but its valuations have been inflated by the market hype around generative AI services. Investors who want to invest in Nvidia should consider if it’s best to wait for the stock to cool off. Meta can be a more promising value play for investors seeking to get into tech stocks.