Nvidia Corp. (NVDA, Financial) and Lam Research Corp. (LRCX, Financial) have been among the hottest stocks in the entire S&P 500 this year, with shares up more than 215% and 60%, respectively, year to date. Indeed, momentum investing can be dangerous for those who do not have an exit plan. As valuations continue to expand, investors should be prepared for nothing short of turbulence as markets wander into the fourth and final quarter of 2023.
Last year saw the many tech stocks driven by the fear of missing out crash in devastating fashion. So far this year, it has been a year that has allowed tech-heavy investors to breathe a collective sigh of relief. Though it is impossible to know what tech plays are in for next, I do think it is becoming increasingly difficult to ignore the hottest chip plays, especially those with growing exposure to the generative artificial intelligence boom.
The AI revolution and its impact
The AI revolution seems to have arrived and with it has been impressive gains. Even if AI continues to deliver riches, it is really hard to tell who the winners and losers will be after such a euphoric year-to-date run in the broader basket of AI stocks.
Focusing on hardware: Nvidia and Lam Research
In this discussion, I will focus on the hardware side. Nvidia is not only the hottest way to play AI chips, but it is also one of the hottest technology companies on the planet, with it coming off two absolutely magnificent quarterly beats on the bottom line.
Lam Research is a wafer fabrication equipment maker that also stands to gain a lot from the AI-driven pop in chip demand. Just over a week ago, the company crushed its sales estimates, thanks in part to the AI boom.
So should investors just "give in" and buy Nvidia stock while it is trading at more than $450 per share? Or could another hardware play be richer with value and upside? Let's have a closer look at the two names so value investors can make a more informed decision.
Assessing Nvidia
Nvidia's stock somehow continues to defy the laws of gravity. Indeed, standing pat due to valuation concerns seems to have been the wrong call. Shares of the company have always been quite pricey. With the unprecedented demand for AI chips, a large premium is more than justified. But with so much hype already priced in, bubble concerns, I believe, are more than warranted.
Personally, I do not think Nvidia is a bubble that is just waiting to burst. That said, a huge double-digit percentage plunge should not be out of the question. Even if shares were to get slashed in half from here to $225 per share, they would still be considerably higher than where they were during last October's trough of around $112 per share.
At the time of writing, shares go for 108.9 times trailing price-earnings. That is seriously expensive, with a lot of expectations built in ahead of the company's next quarterly earnings report.
While there's a good chance Nvidia could deliver a third consecutive blowout result, it is tough to tell how the stock will react from its euphoric highs, especially if broader stock markets look to give up the gains enjoyed through most of the year.
Investment expert Rob Arnott views Nvidia stock as a bubble. Should the stock be in for a bubble burst, Arnott believes the AI chip giant could drag the rest of the stock market down with it. The company'ss valuation concerns are real, but shorting shares could prove just as risky, if not riskier, than going long. Why? Even if Nvidia is in a bubble, it is hard to time when the burst happens. The stock could easily continue its run and squeeze out the shorts brave enough to take a contrarian view of one of the market's hottest stocks.
Sure, the H100 chip is a marvel. But Nvidia's capability is not enough reason to be a buyer of the stock.
Looking at Lam Research
The AI boom has helped give Lam Research a nice lift of late. After delivering a solid fourth quarter that saw earnings per share of $5.98 beat the $5.07 estimate, Lam certainly seems like one of the more modestly valued semiconductor plays to consider as some sort of catch-up trade.
The company's high-bandwidth memory semiconductors play a key role in AI chips. As the AI boom continues, one has to think the demand for such a key component could heat up further.
Lam CEO Timothy Archer was incredibly upbeat following the latest round of results. In fact, Archer thinks "emerging growth drivers such as generative AI" are in the "initial stages of adoption" and believes it is vital to invest accordingly to cater to what could be a multiyear AI boom.
I think Archer is right on the money and could lead Lam Research stock to even higher highs as demand for all things AI remains hot. The most compelling part has to be the valuation. Sure, the wafer equipment maker does not have the type of AI exposure that Nvidia has. However, it can benefit from the continued rise of AI and at a far lower price of admission.
The stock trades at just 19.97 times trailing price-earnings, making it one of the more intriguing value options in the entire semiconductor space today.
Final thoughts
Unless you are willing to run the risk of a big loss, I would steer clear of Nvidia at these levels. Lam Research, on the other hand, stands out as a relative bargain, given its potential to benefit from the AI revolution.
