If I Could Only Buy 1 Artificial Intelligence (AI) Stock, This Would Be It

While artificial intelligence (AI) investing is still a central theme in the market, some of the key players in that space haven't been doing so hot lately. Nvidia (NASDAQ: NVDA) is one of them. It's down by more than 16% from its all-time high. Furthermore, it's only up around 6% this year, trailing the market's nearly 9% gains, as measured by the S&P 500 (SNPINDEX: ^GSPC). So not only has it been a poor performer overall, but the most basic investment an investor can make is outperforming it.

However, I think the time is coming for Nvidia's stock trend to turn around. If I were handcuffed and only allowed to buy one AI stock, I think it would be Nvidia. The company still stands right at the center of the AI build-out, and with massive growth in store, it's a smart buy now.

Image source: Getty Images.

The AI build-out is far from over

Nvidia makes graphics processing units (GPUs) and the ecosystem that supports their use. GPUs have been the top choice to provide AI processing power ever since the AI arms race kicked off in 2023, and Nvidia's have been and remain best in class. Its latest-generation Rubin architecture, now shipping to customers, will drive further growth due to its markedly increased capabilities.

However, Nvidia isn't alone in the space. Other companies make fantastic GPUs, and custom chip designers are partnering with hyperscaler clients to tailor application-specific integrated circuits (ASICs) precisely for their intended workloads. This intensifying competition creates an execution risk for Nvidia.

However, I think it's still primed to dominate the accelerated computing market, as it's growing at a faster rate than its GPU competitors, and ASICs by design are useful only for a narrow range of applications.

The AI build-out pie is also getting bigger. This year, the four major hyperscalers alone are expected to spend a whopping $650 billion on capital expenditures. Next year, Nvidia projects that figure will rise to over $1 trillion. By the end of the decade, Nvidia expects $3 trillion to $4 trillion in global annual data center capital expenditures. If its forecasts are right, that creates a massive opportunity for all companies in the space, so Nvidia could lose some market share and still be a fantastic investment.

But why do I think it's the best AI stock to buy now? It all comes down to valuation.

NVDA PE Ratio (Forward) data by YCharts.

Right now, Nvidia trades at basically the same forward earnings ratio as the S&P 500. In other words, the stock is being priced as market-average, despite strong growth expected again next year. When next year's growth is considered, there's major upside, as it's unlikely Nvidia will actually trade at that much of a discount to the broader market.

There is major upside ahead for Nvidia, and I think it's the best AI stock to buy right now.

Keithen Drury has positions in Nvidia. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.