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For the past few years, Nvidia (NASDAQ:NVDA) stock has been the go-to for those looking to gain exposure to AI. The share price has done handsomely in the process, rallying 39% in the past year. Yet after talking to a friend, there are several reasons as to why there might be other, better AI picks for investors right now.
Growth is priced in
Some investors buying the stock aren’t focused on this quarter’s earnings, but rather on the expectation of future earnings growth. This is one of the reasons the price-to-earnings ratio is high at 46. People aren’t buying it on earnings right now, but they could be years down the line, when AI adoption is much broader.
That’s fine, but it means the company has a high bar to meet. For 2026, the market may need continued stronger-than-expected earnings and revenue growth to justify the high valuation. If competitors win share or demand slows, expectations could get repriced quickly. This isn’t the case for competitors like Intel and Advanced Micro Devices, which would be the ones gaining market share. It’s one factor that could make these companies more attractive options.
Market cap
Nvidia is the largest company in the world by market cap. It currently stands at a whopping $4.43trn. This could make it harder for the share price to continue to deliver meaningful gains this year and beyond, simply because of the existing size.
For example, a small AI company might have a market cap of $1bn. It’s entirely plausible that the stock could double in value, pushing the market cap to $2bn, if the firm shows growth potential. Yet Nvidia would need to do something pretty extraordinary to add another $4.43trn worth of value to the business to replicate a 100% move. Put another way, Nvidia is now so large that it’ll struggle to expand at the same pace as when it was smaller.
Adjusting the view
Maybe I’m being too pessimistic. One argument from the other side is that, given the company’s size, it can afford to invest billions in research and development. This could help it to stay ahead of the crowd.
It’s also diversifying operations. Earlier this week, news broke of it partnering with Lilly to “pioneer robotics and physical AI to accelerate and scale medicine discovery and production.” The statement spoke about how it could “reinvent drug discovery as we know it.”
Both these factors do add weight to the case that Nvidia could keep doing well. Yet, at the end of the day, I don’t disagree with this view. Rather, I don’t think the size of the gains this year will match that of some other AI companies. On that basis, I’m looking for smaller companies with large potential to invest in instead, and think investors could consider doing the same.
