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Missed Out on Nvidia's Skyrocketing Trillion-Dollar AI Run? Here's My Best AI Chip Stock to Buy Now and Hold Forever.

Motley Fool - Sat Sep 23, 2023

The tech sector is going wild in 2023. A sectorwide frenzy for artificial intelligence (AI) stocks is driving many stocks through the ceiling. In particular, chip designer Nvidia(NASDAQ: NVDA) has joined the exclusive club of trillion-dollar market caps by more than tripling its stock price in the last 52 weeks.

This doesn't look like the best time to put new money into Nvidia, though. I'm tempted to cash in some of the gains in my own Nvidia position, because this rally may be overdue to a painful price correction. There's no shame in taking some Nvidia profits off the table. Even CEO Jensen Huang is doing it.

However, there's no shortage of AI chip stocks that haven't soared like Nvidia this year. If you missed the skyrocketing Nvidia jump -- or maybe you're planning to move a part of your Nvidia gains into a less overheated chip stock -- you should consider Dutch-Texan semiconductor giant NXP Semiconductors(NASDAQ: NXPI).

How NXP relates to the AI market

You might not think of NXP as an AI expert, but the company actually approaches the artificial intelligence opportunity from several angles.

  • As a market-leading chip provider for automotive computing, NXP has years of experience in machine learning and self-driving vehicle systems. Automotive chips accounted for 57% of NXP's total revenues in the recently reported second quarter -- this is what the company is known for. Yet, many investors don't seem to connect the automotive market with AI technologies.
  • NXP's microcontrollers are also often found in edge computing situations, processing real-time data for industrial processes, smart home devices, and internet of things gadgets. The basic data analysis is leaning into full-blown machine learning systems. We're talking about advanced AI software running on small systems with limited memory, network access, and other computing assets. In some cases, they run on batteries, placing hard limits on the power usage. This is not an easy market to break into, but NXP is in the thick of it.
  • Machine learning is increasingly important in the smart home and smart city markets, too. AI-enabled devices such as door locks, thermostats, and room lights can be tricky to program just right. Did I forget to turn off the oven? Is the front door locked? NXP's microcontrollers and machine learning platforms can simplify the process, saving energy and providing peace of mind in the process.

So yes, NXP is very involved in the artificial intelligence business.

NXP's stock is undervalued

Despite NXP's robust position in several exciting long-term markets, the stock has not followed the AI trend with a skyrocketing leap. NXP's share price is up by a modest 23% in 2023, and don't forget about last year's deep plunge. This stock fell by 31% in 2022. Since the end of 2021, we're looking at a 15% loss.

And I get it. NXP's revenue growth has slowed down from impressive double-digit percentages to roughly flatlining in recent quarters. That's a scary proposition for growth investors, who expect nothing but high-octane revenue growth. The inflation-tinted economy in recent quarters has not been helpful in that regard.

What the future holds for NXP investors

But the market is getting back on its feet. NXP keeps delivering sales and earnings well above analyst expectations, while setting bullish guidance targets for upcoming reports. Long story short, NXP's business is poised to rekindle its faded growth fires. On top of that, I'm convinced that the company's AI opportunities are underappreciated. This company is going places -- largely under Wall Street's radar.

NXP Semiconductor's shares are valued at 3.9 times trailing sales and 21 times free cash flows. Nvidia's valuation stands at 32.2 times sales and 102 times free cash flow. Is that a sustainable price level? I'm not so sure. As a result, NXP looks like a low-cost AI alternative to Nvidia's expensive stock.

Both companies are great but NXP's shares aren't expensive. That's a deal in my book.

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Anders Bylund has positions in NXP Semiconductors and Nvidia. The Motley Fool has positions in and recommends Nvidia. The Motley Fool recommends NXP Semiconductors. The Motley Fool has a disclosure policy.

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