Better AI Stock: Nvidia vs. Broadcom

Nvidia (NVDA 4.05%) and Broadcom (AVGO 3.23%) are two different ways to invest in the booming artificial intelligence (AI) market. Nvidia is the world’s largest manufacturer of high-end GPUs, which are used to process complex AI tasks in data centers. Broadcom’s chip business sells the networking and optical chips for transferring all that data.

Over the past three years, Nvidia stock is up about 510% as Broadcom stock is up more than 260%. benchmark PHLX Semiconductor Sector the index only increased by about 60% over the same period. Let’s see why these two hot chipmakers have outperformed their industry peers — and which stock is the best buy right now.

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Nvidia remains the top AI market leader

Nvidia once generated most of its revenue from PC gaming GPUs. However, the rapid expansion of the AI ​​market has turned its data center business into its largest and fastest growing business. It generated 87% of its revenue from data center chips in its most recent quarter, and that segment should remain its main growth driver. All the world’s leading AI software companies, including OpenAI, Microsoft, Meta platformsand AlphabetGoogle — runs its services on Nvidia chips.

Nvidia is clearly the leading provider of crawlers and shovels for the AI ​​gold rush, and market demand consistently outstrips available supply. From fiscal 2024 to fiscal 2027 (ending January 2027), analysts expect its revenue to grow at a staggering compound annual growth rate (CAGR) of 50% as EPS grows at a CAGR of 56%.

Trading at 34 times next year’s earnings, Nvidia stock still looks reasonably valued relative to its upside potential. But investors should not overlook potential macro, competitive and regulatory challenges. An economic crisis is causing many companies to put the brakes on their purchases of Nvidia’s expensive data center GPUs. As for the competition, Advanced microdevices it could sneak up on Nvidia with its cheaper data center GPUs, and most of Nvidia’s biggest customers have already developed their own AI accelerators. Tighter trade restrictions on advanced artificial intelligence chips could also reduce its sales in China. Nvidia is a great investment if you believe the AI ​​market will continue to expand. But if you think it’s a bubble about to burst, it could be a risky play.

Broadcom is a more diversified chip and software game

Broadcom, which was known as Avago before acquiring the original Broadcom and inheriting its brand in 2016, operates two main businesses. Its semiconductor business sells chips for the mobile, wireless, networking, data storage and industrial markets. Its infrastructure software business — which it expanded with the acquisitions of CA Technologies, Symantec’s enterprise security division, and VMware — provides on-premise and cloud-based software for large companies.

In its most recent quarter, Broadcom generated 56% of its revenue from its semiconductor business and the remaining 44% from its infrastructure software business. For fiscal 2024 (which ends in October), the company expects sales of its AI-oriented chips to triple to about $12 billion, or nearly a quarter of its projected full-year revenue. That rapid growth is expected to offset its slower sales of non-AI chips and infrastructure software.

Those slower-growing businesses should also heat up again as the macroeconomic environment improves. This diversification makes Broadcom a more balanced technology company that is not as closely tied to the AI ​​market as Nvidia.

But it also grows at a slower rate. From FY2023 to FY2026, analysts expect its revenue to grow at a CAGR of 24% as EPS grows at a CAGR of 18%. It also trades at 44 times next year’s earnings, which makes it look slightly more expensive than Nvidia. On an adjusted basis (which excludes its acquisition-related expenses), it appears to be more reasonably valued at 29 times forward earnings. Broadcom’s forward dividend yield of 1.2% is also much higher than Nvidia’s weak forward yield of 0.03%.

The better the AI ​​plays: Nvidia

Nvidia and Broadcom are both excellent long-term investments. But if you want to take full advantage of the secular expansion of the AI ​​market, Nvidia is the more obvious play. It will remain the leading AI accelerator chip supplier for the foreseeable future, has incredible pricing power, and its stock doesn’t look overvalued yet.

Broadcom is a more balanced and diversified play in the semiconductor and software markets, but much of its recent growth has been driven by its massive acquisitions. It has made a lot of smart investments so far, but it could eventually “de-worse” its business and take on too much debt with this ambitious inorganic expansion. So if you want a simpler way to invest in the AI ​​market, it’s still smarter to buy Nvidia instead of Broadcom.