Artificial Intelligence (AI) has been the buzzword of the year in the stock market, and one stock has emerged as the focal point of the AI stock rally.
That's Nvidia (NASDAQ: NVDA), the AI chipmaker best known for making graphics processing units (GPUs), which are used for gaming, autonomous vehicles, and now AI applications.
Demand for the company's AI chips have soared this year, propelling the stock to triple in value year to date. However, that rally bakes in high expectations for Nvidia as the stock now trades at a trailing price-to-earnings (P/E) ratio above 200, making it a risky stock to buy, especially with so much uncertainty in the AI market.
If you missed out on the Nvidia surge, there's another AI chip stock worth buying now.
Image source: Getty Images.
Move over, Nvidia
Broadcom (AVGO 3.84%) may not have the name recognition of Nvidia or Intel in the semiconductor sector, but the stock has been a consistent winner, up more than 2,000% over the last decade.
Broadcom specializes in networking chips for the wireless and broadband communication industries, as well as for industrial and automotive applications. Its chips are used in a wide range of devices, including smartphones, routers, servers, switches, and other electronic equipment.
Networking is a key component in generative AI, meaning that Broadcom should be a beneficiary from increasing demand in the space, even if it doesn't have as much exposure to the emerging technology as Nvidia.
CEO Hock Tan shared on the most recent earnings call that revenue from generative AI-related opportunities has grown from 10% of its semiconductor-solutions business (which makes most of the company's total revenue) in fiscal 2022 to 15% of that business today. Generative AI is expected to make up 25% of semiconductor revenue next year. He also said that quarterly revenue from generative AI was expected to double from the beginning of 2023 to the end of the year, topping $1 billion in Q3.
Tan talked up several of the company's AI-focused products as well, including its Tomahawk 5, an ethernet switch chip, and its new Jericho3-AI chip, which the company says enables the highest-performance fabric for AI networks, and offers faster training and inference for large-scale AI models than any other alternative on the market.
Networking revenue at Broadcom grew 20% in Q2, and the company expects another round of 20% growth in Q3 due in part to AI demand.
Why Broadcom is a buy
Unlike many of its semiconductor peers, Broadcom has continued to deliver revenue growth during a challenging time in the industry as a supply glut and falling demand for PCs and gaming has led to lower prices. In fact, even Nvidia saw revenue decline on a year-over-year basis in its most recent quarter.
Broadcom is less exposed to struggling segments like PCs, gaming, and data center, and posted 8% revenue growth in Q2 with mixed results in its individual segments.
The company's competitive advantages can also be seen in its huge margins. In the most recent quarter, despite the industrywide weakness and sluggish growth at Broadcom, it reported a 46% operating margin and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margin of 65%. That's a clear sign that the company enjoys pricing power and that customers are willing to pay up for its chips.
Best of all, Broadcom shares are priced affordably. The stock currently trades at a reasonable P/E ratio of just 26, and it offers a 2.2% dividend yield to boot. Given its potential growth in AI, that makes the stock a bargain.
If you missed the boat in Nvidia, there are still opportunities in AI stocks. Broadcom looks like a great choice if you're looking to capitalize on the boom in AI chips.
