2 Artificial Intelligence (AI) Stocks to Buy Instead of Nvidia

The hottest artificial intelligence (AI) stock has been, without a doubt Nvidiawhose graphics processing units (GPUs) have become the backbone of AI infrastructure development. However, with spending in the space still frenzied as companies rush to compete, Nvidia won’t be the only winner.

While Nvidia has been a great stock, I want to highlight two more companies that have a lot of upside potential from the AI ​​advantage.

Broadcom

While Nvidia is the mainstream GPU leader, Broadcom (AVGO -2.60%) seeks to be a leader in custom AI chips. These are application-specific integrated circuits, or ASICs, that are designed specifically for a customer’s precise needs. These chips are built to run specific AI workloads and as such are more efficient than general purpose GPUs.

Broadcom’s first customer in the space was Alphabetfor which he helped design and provide key technologies for its Tensor Processing Units (TPUs). These TPUs are now used for both AI training and inference. Alphabet claims that what separates its TPUs from GPUs is that they have several specialized features, including a matrix multiplication unit (MXU) and proprietary interconnect topology, which make them ideal for accelerating AI training and inference .

The company has announced that it has added several large AI chip customers this year, which are believed to be Meta platforms and China’s ByteDance, owner of TikTok. ByteDance needs AI chips to comply with US export restrictions because Nvidia’s most advanced GPUs are not allowed to be shipped to China. Meta, meanwhile, values ​​its strategic relationship with Broadcom so much that the company added its CEO to its board earlier this year.

There are also several reports that OpenAI will become Broadcom’s fourth big AI chip customer, as it has been in talks with the company to design its own chips. There were also rumors that the company had secured a fifth AI ASIC customer with a planned increase in 2026.

Custom AI chips are a large and growing market, which helped Broadcom continue to raise its AI revenue forecast, which started the year at $7.5 billion but now stands at $12 billion. With the addition of new customers, this is a huge opportunity for the company over the next few years.

Image source: Getty Images.

Broadcom also benefits from providing networking components used in building AI data center infrastructure. The company believes that its Ethernet switches will be at the heart of handling AI workloads and data transfer between GPUs, and that as GPU clusters get larger, the importance of switching becomes more important.

AVGO PE Ratio data (1 year ago) by YCharts

Broadcom has a huge AI opportunity ahead, while the stock trades attractively at a forward price-to-earnings (P/E) ratio of below 28, based on next-year analyst estimates and price/earnings- growth. (PEG) ratio of 0.75. Generally, a stock with a PEG below 1 is considered undervalued, and growth stocks often have PEG ratios much higher than 1.

Given its valuation and growth prospects, Broadcom stock looks like it could be AI’s next big winner.

Taiwan Semiconductor

Taiwan Semiconductor Manufacturing (TSM -2.99%)or TSMC for short, is the largest semiconductor manufacturer in the world and as such plays a vital role in the chip manufacturing process. It makes chips for most of the top semiconductor companies, including Nvidia and Broadcom Applewhich designs its own chips for use in its devices, is its biggest customer.

As such, the company benefits from the proliferation of chips needed both to build AI infrastructure and any hardware upgrade cycle that may accompany it for smartphones and other devices. In general, it doesn’t matter who wins the AI ​​chip race because most of the big players are its customers.

Given the insatiable need for chips, it’s no surprise that TSMC’s services are in high demand, and the company is working to increase capacity to meet this growing demand. Meanwhile, there’s no sign so far that demand is abating, as big tech companies continue to ramp up their investments in AI infrastructure, and more and more computing power is needed as language models (LLM) become more advanced.

With such high demand for AI chips, capacity at TSMC’s foundries (chip manufacturing facilities) is tight, giving the company a lot of pricing power. Conformable morgan stanley, the company is set to raise prices by 10% for AI semiconductors and chip-on-wafer-on-substrate products, 6% for high-performance computing and 3% for smartphones.

TSM PE Ratio data (1 year ago) by YCharts

The combination of increased ability to meet demand and strong pricing power makes TSMC one of the biggest beneficiaries of AI over the next few years. Meanwhile, the stock is trading relatively cheap at a forward P/E ratio of around 21, based on next year analyst estimates, and a PEG ratio of just over 1. Given its robust outlook, the stock looks like a solid buy at the levels current.