Better augmented reality stock: Apple vs. Nvidia

There are always new trends and fads in the technology sector, each with the promise of becoming the next big thing. One of the most prominent emerging technologies of recent years is augmented reality (AR). Simply put, AR is the ability to combine the real world with a digital one. Two prominent examples of this technology are the popular Pokémon Go mobile game and the app Snapchat

Since there are already use cases for AR, it’s easy to see this more as an ongoing trend than a passing fad. So it makes sense for forward-looking investors to look for ways to invest in the space. There are two companies that I think are particularly well positioned to be at the center of AR in the coming years: Apple (NASDAQ: APPL) and Nvidia (NASDAQ: NVDA). Let’s see which stocks are the best to own.

1. Apple

Already one of the largest companies in the world, Apple has left an indelible mark on our society with its range of consumer electronics such as phones, tablets, smartwatches and computers. Part of what has made Apple so successful is its ability to consistently innovate and introduce new product lines. At any given time, there are countless rumors circulating about what could be Apple’s next big product.

Apple has long been expected to release some sort of AR product, likely in the form of glasses or goggles. Recently, Apple CEO Tim Cook made comments that seemed to indicate something could be on the horizon, teasing, “I couldn’t be more excited about the opportunities we’ve seen in this space. And stay tuned. and you’ll see what we have to offer.”

To be clear, rumors and vague interview remarks aren’t an investment thesis, but Apple does have a track record of launching new products that will be hugely successful. Moreover, Apple has been a player in this field for years and will be introducing AR capabilities on its iPhone and iPad from 2017 onwards.

Even without a confirmed AR product, Apple remains a good investment† In the second quarter of 2022, Apple posted record revenue of $93.7 billion, an increase of 9% year-over-year. That’s on top of 54% revenue growth in the same quarter last year, and was driven by year-over-year growth in every product category except the iPad. In addition, Apple trades for a price to profit (P/E) multiple of 23, which is slightly lower than the S&P 500the average of 24.

2. Nvidia

From its beginnings building graphics cards for PCs, Nvidia has grown into a leading supplier of chips for various use cases, including gaming, data centers and the automotive industry. As for AR, Nvidia’s technology is already being used in various ways by large enterprise customers. Nvidia’s chips are the driving force behind virtual car showrooms, surgical training and architectural walkthroughs, showing the day-to-day use cases for this technology.

One of the most frequently cited consumer applications for AR is gaming, which accounts for about 43% of Nvidia’s revenue. In the first quarter of 2023, gaming revenue reached a record $3.6 billion, up 31% year-over-year. One of the Nvidia products that led to this growth was Nvidia RTX technology, which can help deliver AR experiences over 5G networks. As AR expands into the gaming space, Nvidia will capitalize on the secular tailwind.

Even after the tech sell-off we’ve seen this year, Nvidia is trading at a premium, with a current P/E of 41. However, that’s the lowest number since late 2019. Nvidia grew its revenue by more than 46%, is profitable and generated over $1 billion in free cash flow in the first quarter, so this premium price is to be expected.

Which is the better buy?

From a valuation standpoint, it could be argued that Apple is a steal at its current valuation. That said, until we see a real AR product, its role in this emerging technology is uncertain. For that reason, I think Nvidia is the better AR stock. It produces all the chips that power AR technologies in various industries and does not rely on a single consumer product for its AR exposure. For investors who feel the premium valuation is worth it, Nvidia is my pick for the better augmented reality stock

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