Nvidia vs. Cerebras: Better AI Stock to Buy Now

Nvidia (NASDAQ: NVDA) has been the "go-to" artificial intelligence (AI) stock since the start of this technology revolution. Why? Because the company offers the most powerful chips that fuel the most essential of AI operations, such as training models and guiding them through their work. Other chip designers -- market giants such as Advanced Micro Devices and Intel -- also are benefiting from the AI boom, but Nvidia remains the leader.

Now, however, a young player is set to challenge this market behemoth, and investors are clearly intrigued. Cerebras Systems (NASDAQ: CBRS) began trading on May 14, and the stock soared 68% in the biggest initial public offering of the year. The company raised more than $5.5 billion and finished the day with a market capitalization of nearly $67 billion.

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So, which is the better AI stock to buy after this exciting market debut? Should you go with market giant Nvidia or promising challenger Cerebras? Let's find out.

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Nvidia has been a surefire winner for investors over the past several years -- for example, over five years, it's soared 1,500%. This is due to its dominance in the AI chip market and the fact that this has translated into explosive earnings growth. Nvidia makes the graphics processing units (GPUs) that, year after year, have proven themselves to be the most powerful. So, tech giants eager to offer themselves the best AI tools have piled into Nvidia's systems.

As a result, Nvidia's revenue climbed to $215 billion in the recent full year -- up from $27 billion just three years ago. And this is at a high level of profitability, with gross margin exceeding 70%.

The big question investors have posed is whether chip rivals will eventually chip away (excuse the pun) at Nvidia's market share. So far, Nvidia's line of defense has been its commitment to innovation as well as its deep presence across industries. The company has updated its chips and systems on an annual basis, making it difficult for rivals to surpass its technological strengths. Nvidia also has forged partnerships with a broad range of companies to establish itself as a key player in AI development across industries -- for example, in a partnership with Nokia, it's bringing AI to the launch of 6G and future telecom systems.

All of this may help Nvidia maintain its market dominance and continue to deliver enormous growth as the AI boom marches on.

Cerebras is the exciting young player that already has scored an AI win for some investors -- those who participated in the IPO. Now, those early investors and others who buy the stock in the coming days hope this is just the beginning of a new AI success story.

The company could have what it takes to make that happen. Cerebras offers AI chips that are much bigger than those of Nvidia -- and the company says this results in impressive speed. In inference, or the thinking process models go through, Cerebras chips have generated answers as much as 15 times faster than "leading GPU-based solutions."

"We believe that our high-speed AI solutions give us a meaningful competitive advantage in this market," the company wrote in its prospectus.

This has translated into revenue growth, with revenue of $24 million in 2022 increasing to more than $510 million last year. And this momentum may continue as customers turn to this newish player. Cerebras in January announced a $20 billion deal, spanning several years, to offer compute to AI lab OpenAI.

Cerebras offers its customers hardware on site, or they may access compute via the Cerebras Cloud or through other cloud service providers, such as Amazon's Amazon Web Services (AWS).

So growth may just be getting started for Cerebras -- and its investors.

Both of these companies may benefit from the AI story as it advances. Demand remains high for compute, and the AI market is set to reach into the trillions of dollars in the coming years. It's also important to note that the more AI is applied to real-world problems, the more customers will need computing power.

Which stock is the better buy today? Though Cerebras might have a very bright future, after its massive initial gain, I would wait for a dip to get in on the stock. It's important to remember that Cerebras is in the early days of its AI story and doesn't offer the earnings strength or market leadership of giant Nvidia -- this younger player still carries more risk as it works toward generating consistent operating profit and grows its AI presence.

Of course, Nvidia stock has climbed significantly over time. But its long-term prospects and valuation today suggest it has plenty of room to run. Right now, Nvidia stock looks reasonably priced at 28x forward earnings estimates, down from more than 40x just a few months ago, offering growth investors a buying opportunity they may not want to miss.

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Adria Cimino has positions in Amazon. The Motley Fool has positions in and recommends Advanced Micro Devices, Amazon, Intel, and Nvidia. The Motley Fool has a disclosure policy.