Semiconductor stocks have been on fire over the past year or so as the sector received a nice shot in the arm from rising demand for artificial intelligence (AI) chips, which explains why shares of chip giant Nvidia have jumped a whopping 216% in the past year.
Nvidia boasts a 92% share of the data center GPU (graphics processing unit) market, and that dominant position has led to outstanding growth in the company's revenue and earnings in recent quarters. It could also lead to another solid year of growth for Nvidia given the massive opportunity in AI chips.
According to a forecast by investment banking firm Raymond James, the market for chips powering generative AI applications could double in 2024. Given Nvidia's position in that market, that growth should translate into a huge revenue bump: Third-party estimates foresee the company generating $76 billion in data center revenue this year. That would be a substantial jump over the $44 billion data center revenue Nvidia may have clocked in its fiscal 2024 (which ended Jan. 31).
However, Nvidia is not the only way to capitalize on the AI chip market. JPMorgan analyst Harlan Sur believes that chipmaker Broadcom (AVGO 3.84%) could become the second-largest supplier of AI semiconductor chips this year.
Broadcom could generate significant AI revenue this year
The JPMorgan analyst has an overweight rating on Broadcom stock with a price target of $1,550 -- more than 20% above current levels. According to Sur, the chipmaker could generate AI revenue of $8 billion to $9 billion in 2024 thanks to its dominant position in the market for custom chips, especially high-end application-specific integrated circuits (ASICs) deployed for AI workloads.
According to JPMorgan, Broadcom reportedly commands a 35% share of the high-end ASIC market. This puts it well ahead of second-place Marvell Technology, which has a 12% market share. Broadcom's solid position means that it is well-placed to make the most of a fast-growing opportunity.
The market for high-end custom ASICs was reportedly worth $13 billion to $18 billion in 2023. This market is expected to clock annualized growth of 20% in the long run as more companies look to manufacture custom AI chips. The good part is that Broadcom has reportedly built a solid pipeline of customers for its custom chips, reportedly landing two to three major deals last year.
Broadcom has been involved in designing every generation of Google's tensor processing units (TPUs), and also counts the likes of Microsoft and Meta Platforms as customers. It is worth noting that all these companies have been working on custom chips to train AI models efficiently and cost-effectively.
Not surprisingly, Broadcom's AI revenue has been growing at a nice pace of late. The company sold $1.5 billion worth of generative AI chips in the fourth quarter of its fiscal 2023 (which ended on Oct. 29), which was 16% of its total revenue. That translates into an annual revenue run rate of $6 billion. So JPMorgan's estimate that Broadcom could generate $8 billion to $9 billion in AI chip revenue this year points toward a potential jump of 33% to 50% based on its annual revenue run rate last quarter.
The valuation makes the stock an attractive bet
Analysts anticipate Broadcom's revenue will increase by almost 40% in its fiscal 2024 to $50 billion, including a $12 billion contribution from VMware, which it recently acquired. The stock currently trades at 14.6 times sales following a 105% spike in the past year.
Still, it is significantly cheaper than Nvidia, which trades at 38 times sales. Of course, Nvidia can justify its steep valuation thanks to its sizable AI business, which is much bigger than Broadcom's. However, conservative investors may want to look for cheaper AI chip plays, which is where Broadcom comes in.
The company enjoys a healthy market share in custom AI chips, a market that's expected to grow at a solid pace in the long run. Also, if Broadcom does hit $50 billion in revenue this year and maintains its current sales multiple, its market cap could increase to $730 billion. That would be a 25% jump from current levels. That indicates that it isn't too late for investors to buy this AI stock, despite the terrific gains it has clocked in the past year.
