Artificial intelligence (AI) has been a leading driver for many tech stocks like Nvidia in recent years. However, as the AI revolution matures, investors may be looking for ideas beyond Nvidia.
There are several ways to approach AI, from hardware and software companies to connectivity solutions, infrastructure plays, and more.
Broadcom (AVGO +4.69%), Synopsys (SNPS 3.11%), and Astera Labs (ALAB +15.24%) support large-scale data centers and cloud computing. Here's why all three growth stocks are worth buying now.
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Broadcom's AI business is delivering exponential growth
Daniel Foelber (Broadcom): Just a few years ago, the biggest markets for Nvidia's graphics processing units (GPUs) were gaming, enterprise graphics design, visualization, and more. Now, high-end GPUs used in data centers are the most important and fastest-growing part of the business.
Nvidia's leadership in GPUs for data centers positions the company at the forefront of the AI revolution. However, the concentration in one end market has made Nvidia less diversified.
Broadcom, another tech giant, is far more diversified than Nvidia. It could be worth a closer look for investors looking to profit from AI in a variety of ways.
Broadcom surpassed $1 trillion in market cap in December, with the stock price increasing over 600% in just five years.
NASDAQ: AVGO
Key Data Points
The company has two segments.
Semiconductor Solutions involves hardware, including chips, ethernet switches, networking devices, and more.
The Infrastructure Software segment has become a much larger share of the company since Broadcom completed its acquisition of VM Ware in November 2023. The segment focuses on network and storage management, virtualization, cloud management, application performance monitoring, and more.
Broadcom's majority share of the application-specific integrated circuits (ASICs) market is an advantage in the age of AI. GPUs are workhorses that can handle various tasks, whereas ASICs are custom-engineered for specific tasks. Lacking flexibility, ASICs tend to be cheaper and more cost-effective than GPUs.
Broadcom's XPU is the company's chip used to train generative AI models. Partnerships with major tech companies have led to explosive growth in XPUs. On the company's Q4 fiscal 2024 earnings call, Broadcom said that XPUs led its AI revenue to grow from $3.8 billion in fiscal 2023 to $12.2 billion in fiscal 2024 -- representing 41% of semiconductor revenue. Put another way, Broadcom's AI business -- led by ASICs -- made up a staggering 23.6% of total revenue in fiscal 2024.
Broadcom is unique because it has massive upside potential from AI, but it also has a stable network connectivity business.
To top it all off, Broadcom pays a growing dividend, with the payout increasing over tenfold in the last decade.
Add it all up, and Broadcom stands out as a balanced tech giant to buy now.
An AI stock that could see demand explode for its solutions in the coming years
Lee Samaha (Synopsys): The boom in spending on AI applications has far-reaching consequences. For Synopsys, an electronic design automation (EDA) software, hardware, and services company, increased spending on AI semiconductors boosts the demand for its solutions for designing, implementing, and producing chips.
Moreover, Synopsys's increased spending isn't just coming from its traditional semiconductor and electronics customers; hyperscalers (large-scale data centers that provide cloud computing services) are also customers.
The deepening and broadening of demand will likely extend beyond semiconductor, electronics, and data center customers as more products have embedded chips. That's part of the reasoning behind Snopsys' acquisition of simulation and analysis software company Ansys, a company with a complementary technology (Synopsys and Ansys are longtime partners) but with a much broader client base. As such, the Ansys acquisition will add to Synopsys' already excellent growth prospects.
According to Wall Street analysts, Synopsys is already set to grow sales at a mid-teens rate and free cash flow at a 30% rate over the next few years. However, the longer-term picture could look even brighter after the Ansys deal (set to complete in the first half of 2025) is complete. The broader industrial markets (for example, automotive, aerospace, and industrial products) that are already Ansys customers could also become Synopsys customers, and the ability to sell a comprehensive solution (design ad production solutions alongside simulation and analysis) is compelling.
Astera Labs provides the computing backbone for AI and cloud infrastructure
Scott Levine (Astera Labs): Nvidia has benefited considerably from the explosive growth in the AI industry, but it's hardly the only game in town. Those looking for an alternative option to Nvidia can direct their attention toward Astera Labs, a developer of connectivity solutions for cloud computing and AI applications.
Unless you keep up with companies that have recently held their initial public offerings (IPO), Astera Labs may not be a recognizable name since it held its IPO less than a year ago, but that doesn't mean the AI-oriented stock doesn't warrant serious attention.
The usage of AI and generative AI tools is escalating rapidly and shows no signs of slowing down. In order to meet the steep computing demands that these tools require, Astera Labs (which counts Nvidia and Advanced Micro Devices as its customers) provides several solutions to support the underlying computing infrastructure. In 2024, for example, the company introduced its Scorpio Smart Fabric Switches, which are specifically designed for AI infrastructure at cloud computing, and it has begun to ship limited quantities in anticipation of ramping up production.
Growing revenue 242% year over year and reporting operating cash flow of $136.7 million (compared to negative $12.7 million in 2023), Astera Labs is coming off a strong 2024 and charging into 2025 -- a year in which management projected "to be a breakout year as we enter a new phase of growth driven by revenue from all four of our product families to support a diverse set of customers and platforms" in its fourth-quarter 2024 financial results press release.
Since it's still the early innings for Astera Labs, there is great potential for investors to enjoy significant rewards from clicking the buy button. Of course, its inexperience as a public company also represents a higher degree of risk, so investors should be comfortable with a more speculative investment.
