Better AI Stock: Nvidia vs. Broadcom

Over the past year, companies have scrambled to implement artificial intelligence (AI) technologies, which has boosted sales for semiconductor chipmakers. Nvidia (NVDA -1.59%) and Broadcom (AVGO 2.20%). Both sell components needed to deploy AI in data centers designed for cloud computing, the ideal place for AI to meet its need for massive computing power.

As a result, Broadcom and Nvidia are positioned to benefit for years as the AI ​​industry expands from a 2023 global market size of $136 billion to an estimated $827 billion by 2030. This is one of reasons why owning shares in both is a great way to invest in the secular AI trend.

However, if you had to choose just one of these semiconductor giants to invest in, which would make the best AI investment? Here’s a breakdown of each to arrive at an answer.

Broadcom’s AI Strategy

Broadcom approaches the AI ​​market with a wide range of products that serve many technology industries, including data centers, wireless networks and industrial applications. The company’s AI strategy involves a combination of hardware and software to help customers meet their AI infrastructure needs.

On the hardware side, Broadcom products include AI accelerators, an essential component for accelerating AI computer processing. Its business’s creation of custom AI accelerators grew more than 3x year-over-year in its fiscal third quarter ended Aug. 4.

Thanks to demand for its AI-related products, the company’s semiconductor division saw sales in its fiscal third quarter rise to $7.3 billion from $6.9 billion a year earlier.

On the software side, Broadcom acquired VMware towards the end of 2023, which is why its software division’s revenue rose to $5.8 billion from $1.9 billion the previous year. The addition of VMware drove total Q3 revenue up 47% year-over-year to $13.1 billion.

Broadcom is using the VMware Cloud Foundation (VCF) platform to target companies that want a private cloud or a hybrid of private and public cloud for their AI systems. The strategy succeeds. VCF accounted for 80% of VMware products booked in Q3.

Broadcom came out of its fiscal third quarter with respectable financials, such as free cash flow (FCF) of $4.8 billion. Its balance sheet included total assets of $168 billion, of which $10 billion was in cash and cash equivalents. Total liabilities were $102.3 billion, of which $70 billion was debt.

Nvidia’s approach to AI

Nvidia’s AI success centers around its graphics processing unit (GPU), which is the heart of an AI system’s ability to perform complex calculations. The company also offers a comprehensive suite of software and other services, such as a robotics platform, to help companies use AI.

The semiconductor giant pioneered the GPU in 1999, steadily improving it over the years. Now, Nvidia chips are the preferred choice for the AI ​​computing industry.

The company continues to evolve its processors, with its new Blackwell GPUs ramping up production this year. According to Nvidia, Blackwell is the largest and most powerful GPU in the world, housing more than 200 billion transistors.

Its GPU leader in AI helped Nvidia reach a record $30 billion in revenue in its fiscal second quarter ended July 28, a 122 percent increase from a year ago. The company expects sales to continue to grow, estimating revenue for the fiscal third quarter to reach $32.5 billion, up from $18.1 billion a year earlier.

Nvidia’s AI strategy includes extending the power of the GPU to various industries, such as automotive, to enable self-driving vehicles. Additionally, its CEO, Jensen Huang, believes that the cloud computing market, worth nearly $600 billion in 2023, will shift to existing infrastructure to support AI systems. This would be a massive market opportunity for chipmakers like Nvidia.

Adding to the company’s investment appeal, Nvidia’s financials are excellent. Its fiscal Q2 FCF was $13.5 billion. Its Q2 balance sheet included total assets of $85.2 billion, of which $34.8 billion was in cash, cash equivalents and marketable securities. Total liabilities were $27.1 billion, with $8.5 billion in liabilities.

The decision between Broadcom and Nvidia shares

Because the AI ​​market is large and growing, both Broadcom and Nvidia should continue to see rising sales. But between the two, Nvidia has seen the biggest revenue growth over the past year with AI taking off, illustrating customer demand for its products.

Data by YCharts.

Another factor to consider for each stock is the price-to-earnings ratio (P/E ratio), a widely used measure to gauge valuation. Broadcom’s P/E multiple of 141 is much higher than the 54 for Nvidia stock at the time of writing, indicating that Nvidia is the better value.

Both Broadcom and Nvidia shares are currently below their 52-week highs. But Nvidia’s market leadership in AI chips, strong financials and superior valuation compared to Broadcom make it the best long-term investment between these two semiconductor titans.