Since the launch of OpenAI's ChatGPT in late 2022, generative artificial intelligence (AI) has taken the technology world by storm. Few companies have benefited more than hardware giants like Nvidia (NVDA 4.43%) and Broadcom (AVGO 0.67%), which supply the data center equipment needed to support this fast-growing industry.
Business is booming, and both companies have turned to stock splits to keep their shares liquid and available to smaller investors. Let's explore the long-term prospects of both companies while acknowledging the potential challenges they may face in the near term.
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Nvidia
After seeing its shares rise over 3,500% in just five years, it's no surprise that Nvidia relies on frequent stock splits to keep its share price under control. The most recent was a 10-for-1 split, effective as of June 7, that brought its stock to around $120 per share. And with the artificial intelligence industry in its early innings, Nvidia is still a long-term winner.
NASDAQ: NVDA
Key Data Points
There is no shortage of grandiose projections for the future of AI. Bloomberg Intelligence believes the industry could be worth a whopping $1.3 trillion by 2032. And with an 80% market share in the advanced graphics processing units (GPUs) needed to power the large language models, Nvidia undeniably has a bright future from a demand perspective.
With a forward price-to-earnings (P/E) multiple of 51, Nvidia's shares are also fairly valued relative to growth. First-quarter revenue increased 262% year over year to $26 billion while net income surged 628% to $14.9 billion.
That said, every new industry experiences growing pains. And with 87% of Nvidia's sales coming from data center hardware, the company is exceptionally vulnerable to any near-term slowdown in AI chip demand, even if its long-term future remains bright.
Broadcom
With an unusually high stock price of $1,735 per share, Broadcom seemed overdue for a split when it announced a 10-for-1 swap expected to go live on July 15. Like Nvidia, the company's stock has soared amid rising AI hardware demand. However, its lower valuation and more diversified revenue streams could make it a safer way to bet on this opportunity.
NASDAQ: AVGO
Key Data Points
While Nvidia is known for its general-purpose AI chips, Broadcom specializes in custom chips designed for its client's specific workloads. This niche allows its hardware to be more cost- and energy-efficient than mass-market alternatives. And business is booming.
Second-quarter revenue jumped 43% year over year to $12.5 billion, helped by rising AI-related demand and the recent acquisition of VMware, a cloud computing company focused on virtual machines, which can run apps on software instead of physical computers. VMware helps diversify Broadcom into many different sides of the tech industry, shielding it from a potential slowdown in demand for AI chips.
With a P/E multiple of 37, Broadcom is also reasonably priced compared to Nvidia, which trades for 51 times forward earnings, even though the latter company seems to have better growth prospects.
Remember: These stocks are not cheap
While stock splits can create the illusion of affordability, they often can indicate the opposite. A stock split usually occurs after a company has already experienced extreme price appreciation. So, new investors aren't exactly getting a bargain deal. That said, over the long term, Nvidia and Broadcom still have what it takes to outperform the market.
In the near term, investors should consider the potential for volatility as the AI industry experiences its growing pains, just like the internet and other megatrends did historically. But between the two companies, Broadcom looks like the safer bet because of its lower valuation and greater diversification.
