Surprise! This AI Giant That's Climbed 1,200% Over 5 Years is Now the Second Cheapest of the Magnificent Seven

Artificial intelligence (AI) stocks have soared over the past few years amid excitement about the promise of this new technology. The idea is that AI tools and services may help companies save time and money and become more innovative -- and the result could supercharge earnings growth. For this reason, investors have rushed to pile into many of these players.

As these stocks climbed, however, something else happened, and this particular thing actually weighed on AI stocks late last year and into the early part of this year: Valuations surged. Many investors considered AI stocks too expensive amid this gold rush, and that put the brakes on their performance in the first quarter.

As a result, valuations of many -- even some of the industry's top players -- dropped. And I have a surprise for you: This AI giant that's climbed 1,200% over the past five years is now the second cheapest of the Magnificent Seven tech stocks. Let's zoom in for a closer look.

Image source: Getty Images.

The Magnificent Seven

So, first, a quick note on the Magnificent Seven. These are a group of well-established and profitable tech companies that have driven the S&P 500's gains over the past few years. The Magnificent Seven companies offer investors the security of a solid business that's proven itself over time -- and the growth that comes with innovation, as they're on the cutting edge of the latest technologies, too.

These companies are names you'll probably recognize, and they span a wide range of tech specialty areas, from e-commerce and smartphones to electric vehicles. I'm talking about Amazon, Apple, Alphabet, Meta Platforms, Microsoft, Nvidia (NASDAQ: NVDA), and Tesla.

The Magnificent Seven companies each are involved to some degree in AI, too, meaning investors have purchased shares in order to get in on this high-growth story. The AI market is forecast to reach beyond $2 trillion by the end of the decade, suggesting more growth may lie just ahead.

So, which of these players is the second cheapest of the bunch? Surprisingly, it actually is the company that's delivered the biggest AI earnings win so far: AI chip giant Nvidia. As the chart below shows, it trades for 24x forward earnings estimates, making it the cheapest after Meta, which has consistently been the least expensive of the group in recent times.

AAPL PE Ratio (Forward) data by YCharts

Is this AI stock a buy?

Now, the question is: Is Nvidia a buy at this level? Nvidia stock has soared over the past several years, and earnings truly took off as it shifted its chip focus from gaming to AI. For example, revenue climbed from $60 billion just two years ago to $215 billion in the latest full year. That's an incredible increase in a rather short period of time.

Some investors have turned away from Nvidia over the past few quarters, with the idea that it will be very difficult to replicate such a gain. That's true, because it's "easier" to deliver triple or even quadruple digit gains when starting from a much lower level of revenue. But this doesn't mean the Nvidia growth opportunity is over.

The company is likely to generate new waves of growth as the AI story shifts into its next chapters, and this is because Nvidia has been preparing for this and has built the foundations for it. Chip companies grew in recent years as customers rushed to them for chips to use in the training process -- the pouring of information into large language models (LLMs).

In recent times, the need has shifted to inference, or the need for chips to power the thinking process of these LLMs. And now, we're shifting into the era of AI agents -- this is when the training and inference come together to form an "agent" that will think and take action to solve problems.

Nvidia has built out its next platform, Vera Rubin, to specifically serve the agentic AI era -- and this system is set to ship in the third quarter. This suggests a new wave of growth may be just ahead.

All of this means that now, as this AI giant trades at a bargain price, it may be the perfect time to pick up the shares.

Adria Cimino has positions in Amazon and Tesla. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla. The Motley Fool has a disclosure policy.