Semiconductor stocks have been a winning theme in the artificial intelligence (AI) stock rally. High-flying chip companies Nvidia (NVDA +0.87%) and Broadcom (AVGO +0.29%) performed so well that management split their stocks to make it easier for investors and company employees to buy or sell shares.
Remember that stock splits lower the share price but offset that by increasing the number of shares. In other words, stock splits don't fundamentally change a stock's valuation. However, a sell-off, like what investors saw recently in the Nasdaq, can.
Even though the market has bounced back, these two (AI) winners remain below their highs. If the Nasdaq continues to sell off, both stocks would be excellent buys for long-term investors. Here is why.
A sell-off creates a much-needed margin of safety for Nvidia stock
No company has enjoyed more AI-driven success than Nvidia, whose graphics processing units (GPUs) have become the primary choice for data centers running complex AI models. Its proprietary CUDA software helps customers unlock the full power of its GPU chips, making them perfect for AI.
The tech industry's power players are in an arms race to build the computing resources needed to support AI growth. That strong demand launched Nvidia's revenue to new heights starting in 2023.
NASDAQ: NVDA
Key Data Points
The AI and cloud heavyweights intend to keep spending. Microsoft said in its latest earnings call that AI demand outstripped its available computing resources. Meta Platforms CEO Mark Zuckerberg recently said in a "fireside chat" with Nvidia CEO Jensen Huang that his company has accumulated nearly 600,000 of the latter's H100 chips and will invest more next year to support AI.
The CEO of Nvidia competitor Advanced Micro Devices believes the broader AI chip market will grow to $400 billion over the next several years. Nvidia, the market leader, only sells a fraction of that today. The signs point to sustained demand, and the company wants to protect its market share by frequently releasing cutting-edge chips to keep pace with innovation.
Revenue probably won't continue growing by triple digits, but analysts believe Nvidia will grow earnings by 36% annually over the long term.
NVDA revenue (TTM) data by YCharts; TTM = trailing 12 months; EPS = earnings per share.
Assuming Nvidia delivers on estimates, the stock looks like a bargain today at a forward price-to-earnings ratio (P/E) of 44, which is attractive for such a fast-growing business. But the company will face competition from other chipmakers and big-tech customers that could try to build their own chips.
So, while the stock could look cheap in hindsight if things go well, investors should welcome any sell-off that will build a margin of safety to account for the unknowns.
A shaky market makes Broadcom a buy-the-dip opportunity
Broadcom has been an excellent stock for AI investors looking for diversification. It specializes in semiconductors for networking and communications and has another business unit that provides infrastructure software to enterprises. Total revenue is split roughly 2-to-1 between its semiconductor solutions and infrastructure software.
Semiconductor stocks are cyclical. AI has created a boom in chip spending, but that will likely slow at some point as AI capacity catches up to demand. Broadcom isn't growing as fast as Nvidia is, but the software business generates recurring revenue that could make the company less volatile over the long term.
NASDAQ: AVGO
Key Data Points
That said, Broadcom is getting a big push from AI; just like how AI models require powerful processing chips, they also create heavy networking loads that need similarly AI-specialized hardware. The company initially guided that AI would contribute 25% of its semiconductor solutions revenue in 2024 but increased that to 35% in the second quarter.
Meanwhile, adding VMware to the software business helped Broadcom's total revenue grow 43% year over year in the second quarter. Organic revenue growth (excluding the acquisition) was still 12%. That isn't explosive, but analysts believe the company will grow earnings by 18% annually over the long term, and that's nothing to sneeze at.
AVGO revenue (TTM) data by YCharts.
Broadcom doubles as an excellent dividend stock, separating it from most AI investments. The starting yield isn't huge, just 1.3%, but management has raised its payout by an average of 19% annually over the past five years.
The stock offers investors a bit of everything: AI upside, dividends, and a diversified business that might hold up better during a sell-off. Shares trade at a forward P/E of 33 today, which isn't shockingly expensive, but it's not cheap, either. Investors can confidently buy and hold Broadcom if the Nasdaq sells off and takes the stock lower with it.
