Nvidia (NVDA +2.71%) and Broadcom (AVGO +4.58%) represent two different ways to invest in the booming artificial intelligence (AI) market. Nvidia is the world's leading producer of high-end GPUs, which are used to process complex AI tasks in data centers. Broadcom's chipmaking business sells the networking and optical chips for transferring all of that data.
Over the past three years, Nvidia's stock soared about 510% as Broadcom's stock advanced more than 260%. The benchmark PHLX Semiconductor Sector index only rallied roughly 60% during the same period. Let's see why these two hot chipmakers outperformed their industry peers -- and which stock is the better buy right now.
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Nvidia remains the top bellwether of the AI market
Nvidia once generated most of its revenue from gaming GPUs for PCs. However, the rapid expansion of the AI market turned its data center business into its largest and fastest-growing business. It generated 87% of its revenue from its data center chips in its latest quarter, and that segment should remain its core growth engine. All of the world's top AI software companies -- including OpenAI, Microsoft, Meta Platforms, and Alphabet's Google -- run their services on Nvidia's chips.
NASDAQ: NVDA
Key Data Points
Nvidia is clearly the top vendor of picks and shovels for the AI gold rush, and the market's demand is consistently outstripping its available supply. From fiscal 2024 to fiscal 2027 (which ends in January 2027), analysts expect its revenue to grow at a stunning compound annual growth rate (CAGR) of 50% as its EPS increases at a CAGR of 56%.
Trading at 34 times next year's earnings, Nvidia's stock still looks reasonably valued relative to its growth potential. But investors shouldn't overlook the potential macro, competitive, and regulatory challenges. An economic downturn drives many companies to rein in their purchases of Nvidia's pricey data center GPUs. As for the competition, Advanced Micro Devices could creep up on Nvidia with its cheaper data center GPUs, and most of Nvidia's largest customers have already been developing their own AI accelerators. Tighter trade restrictions on advanced AI chips could also reduce its sales in China to a trickle. Nvidia is a great investment if you believe the AI market will keep expanding. But if you think it's a bubble on the verge of popping, it might be a risky play.
Broadcom is a more diversified chip and software play
Broadcom, which was known as Avago before it acquired the original Broadcom and inherited its brand in 2016, operates two main businesses. Its semiconductor business sells chips for the mobile, wireless, networking, data storage, and industrial markets. Its infrastructure software business -- which it expanded with its acquisitions of CA Technologies, Symantec's enterprise security division, and VMware -- provides on-premise and cloud-based software for large companies.
NASDAQ: AVGO
Key Data Points
In its latest quarter, Broadcom generated 56% of its revenue from its semiconductor business and the remaining 44% from its infrastructure software business. For fiscal 2024 (which ends this October), the company expects its sales of AI-oriented chips to roughly triple to $12 billion, or nearly a quarter of its projected revenue for the full year. It expects that rapid growth to offset its slower sales of non-AI chips and infrastructure software.
Those slower-growth businesses should also warm up again as the macroeconomic environment improves. That diversification makes Broadcom a more balanced tech company that isn't as tightly tethered to the AI market as Nvidia.
But it's also growing at a slower rate. From fiscal 2023 to fiscal 2026, analysts expect its revenue to rise at a CAGR of 24% as its EPS increases at a CAGR of 18%. It also trades at 44 times next year's earnings, which makes it seem a bit pricier than Nvidia. On an adjusted basis (which excludes its acquisition-related expenses), it looks more reasonably valued at 29 times forward earnings. Broadcom's forward dividend yield of 1.2% is also a lot higher than Nvidia's paltry forward yield of 0.03%.
The better AI play: Nvidia
Nvidia and Broadcom are both great long-term investments. But if you want to fully profit from the secular expansion of the AI market, Nvidia is the more obvious play. It will remain the top provider of AI accelerator chips for the foreseeable future, it has incredible pricing power, and its stock doesn't seem overvalued yet.
Broadcom is a more balanced and diversified play on the semiconductor and software markets, but a lot of its recent growth has been driven by its massive acquisitions. It's made a lot of smart investments so far, but it could eventually "di-worsify" its business and take on too much debt with that ambitious inorganic expansion. So if you want a simpler way to invest in the AI market, it's still smarter to buy Nvidia instead of Broadcom.
