Investors looking for artificial intelligence (AI) stocks have plenty of options. But while there's no shortage of AI stocks to choose from, a few stand out among the rest.
Broadcom (AVGO +4.69%) is one of the tech companies that is a unique play in the artificial intelligence market and could be a good long-term investment. Here are three reasons the stock is a buy right now.
1. It's tapping into a unique AI niche
One of Broadcom's biggest opportunities comes from its application-specific integrated circuits (ASICs) that are used in AI data center infrastructure. Leading tech companies, including Alphabet and Meta Platforms, already use Broadcom's chips to help with their AI infrastructure, and more opportunities could be on the way.
NASDAQ: AVGO
Key Data Points
Companies continue to expand their data centers and AI training needs, creating the perfect environment for Broadcom's high-end niche semiconductors, with one J.P. Morgan analyst estimating the company's total addressable market in AI chips could be $150 billion.
Results for the third quarter (ending Sept. 30) showed just how well Broadcom is tapping into its AI prospects, with management raising its fiscal 2024 AI chip sales outlook to $12 billion, an increase from its previous estimate of $11 billion.
2. AI spending is accelerating
Broadcom is tapping into a unique AI opportunity with its ASICs at a time when tech giants are investing mountains of money into AI data centers. Goldman Sachs estimates that companies will spend $1 trillion over the next few years to build out AI, and Broadcom rival Nvidia thinks the amount could be as high as $2 trillion over the next five years.
Broadcom's AI revenue is already increasing thanks to data center chip demand, and it's likely to continue as more companies expand their AI capabilities. At the end of October, ChatGPT creator OpenAI began tapping Broadcom to design an in-house chip it will use for AI.
No matter which of the spending estimates is more accurate, it's clear that tech companies are investing lots of money on AI infrastructure, and Broadcom's early lead with its AI semiconductors should continue to pay off for the company as spending ramps up.
Image source: Getty Images.
3. Its stock is cheaper than some rivals
Even with Broadcom's share price rising 96% over the past 12 months (as of this writing), its stock is slightly cheaper compared to some of its peers.
Broadcom's forward price-to-earnings ratio (P/E) is currently 27.6, which is cheaper than Nvidia's forward P/E ratio of 34 and Advanced Micro Devices's 28.4. While it's not necessarily cheap, it is technically less expensive, making it a potentially better deal for investors looking for a well-priced AI stock.
If you're on the fence about buying Broadcom now, you could wait to see if the shares pull back a bit. But with the company already successfully tapping into AI semiconductor demand and working with the top tech companies as AI spending is accelerating, owning its shares looks like a good long-term bet.
