Nvidia has been dominating conversations in 2023 as it is the engine powering generative AI, a new breakthrough in computing that many believe will unlock productivity (and thus profitability) for businesses that embrace it.
But Nvidia isn't alone in this pioneering work. In fact, it just jointly announced a strategic partnership with VMware (VMW +0.00%) launching the VMware Private AI Foundation "to ready the hundreds of thousands of enterprises that run on VMware's cloud infrastructure for the era of generative AI."
VMware is a key player in AI now and is pending acquisition by chip giant Broadcom (AVGO +2.96%). Could VMware/Broadcom be a better AI stock than Nvidia to buy right now?
NASDAQ: AVGO
Key Data Points
Forget AI Foundation, what's Cloud Foundation?
To understand what VMware just announced, let's first get a refresh on what the company actually does.
While not a household name, VMware is actually a pillar in the cloud computing industry. Cloud computing is when data and apps are stored in a data center -- a large warehouse-like building that's home to thousands of computers called servers. These data centers can be public (accessed via a public internet connection, with the computing infrastructure shared with many other businesses and individuals) or private (a data center owned and operated by an individual organization, and accessible via that organization's private network).
VMware is a top provider of the designs and software needed to operate these data centers. For years, it helped pioneer the "virtual machines" (where the "VM" comes from in "VMware") that make both public and private cloud computing possible. The company makes money from selling designs and software subscriptions, and distributing other cloud services (like security software), and partners with practically everyone in the cloud infrastructure market: Amazon Web Services, Microsoft Azure, Alphabet's Google Cloud, Oracle Cloud, and more.
Together with a network of hardware and software partners, VMware operates what it calls the VMware Cloud Foundation, a solution that patches together all of the parts an organization would need to update its IT operation for the cloud era.
Now tell me about Private AI Foundation
VMware's new Private AI Foundation builds on its cloud computing work to enable the use of generative AI. Generative AI algorithms (the building blocks of an AI app like ChatGPT) are trained in the cloud using massive amounts of data, and once ready to go, these AI models are often housed in the cloud, too. For example, if you ask ChatGPT a question, your query is being sent via the internet to a remote data center where a response is generated and sent back to you via the public web.
However, business data is proprietary and private. Loss of data or an unauthorized breach can be incredibly damaging (thus the need for cybersecurity software). Much information is sensitive in nature, and a company may not want to house its critical data on a public data center -- much less use a public data center to train and operate a proprietary AI algorithm. That's where VMware Private AI Foundation comes in.
Much like the Cloud Foundation, Private AI Foundation is a ready-to-go architecture for businesses that want to put their private data to use to train and deploy new AI services, all in an environment that protects their most critical and sensitive digital assets. Private AI Foundation has a network of partners, including support from Nvidia's top-of-the-line GPUs for AI algorithm training (available in early 2024). Data center server manufacturers include Dell Technologies, Hewlett Packard Enterprise, and Lenovo Group, and software partners will include AI algorithm and data repository service Hugging Face.
A best AI stock now?
It's no secret that Nvidia's stock carries a very high premium these days as the market has suddenly caught on to the company's pioneering work in data center-based AI. Many investors are in search of another way to invest in the generative AI boom.
VMware, by way of Broadcom, could be a good fit. Broadcom is still awaiting final approval from regulators to acquire VMware. The company expects the deal to close by this October. If it does get the nod to proceed with the VMware takeover, it would combine a top cloud computing infrastructure business with Broadcom's extensive library of semiconductors necessary for building virtually all types of computing systems -- including generative AI chips.
Broadcom has built its empire over the years via multiple acquisitions, often a controversial way to grow as there's risk of overpaying or for the acquired business not to be an ideal fit. But Broadcom has had a pretty good go of it, boosting its profitability and shelling out lots of shareholder returns via dividends and share buybacks along the way. The stock's total return (which includes reinvestment of dividends) has been nearly 400% over the last five years alone.
Data by YCharts.
If Broadcom merges with VMware, it could supercharge growth in the coming years. And if not, this is still a solid semiconductor business with plenty to do with the current generative AI hype. Its shares trade for 27 times trailing-12-month earnings per share (or 21 times free cash flow), and under 19 times next year's expected earnings per share (estimates that don't include VMware, should it become part of Broadcom).
Broadcom isn't a cheap stock, but it could be a downright reasonable price tag for investors seeking a less frothy AI investment than Nvidia right now.
