Nvidia (NVDA 0.48%) has been the top AI investment since the AI arms race kicked off in 2023. Over that time frame, Nvidia's stock has risen over 800%, turning every $10,000 invested into over $90,000. There aren't many stocks that can claim returns like that, let alone any that have grown to the size of Nvidia.
However, some troubles are brewing over at Nvidia that investors must know about. Nvidia has essentially been the sole source of AI computing hardware, allowing it to charge a premium price for its graphics processing units (GPUs). This has caused Nvidia's margins to soar, and its customers are aware of this. The old saying, "Your margins are my opportunity," rings true here, and many of its clients are starting to investigate using custom AI accelerators instead of GPUs.
Broadcom (AVGO +0.88%) has become a valuable partner in designing these custom AI accelerators, which it calls XPUs. A massive market for this hardware could emerge over the next few years, as companies are now ready to optimize their AI training after the valuable lessons learned since 2023.
Image source: Getty Images.
Broadcom expects monster growth from its XPU products
GPUs, like the ones Nvidia makes, are incredible pieces of hardware. They can process multiple calculations in parallel and perform a wide range of tasks, from AI model training to mining cryptocurrency to engineering simulations to drug discovery. However, if a company is only going to use it to train AI models, Nvidia's cutting-edge GPUs have a decent amount of features that aren't needed.
That's where XPUs shine, as they can be designed around running a single type of workload. By optimizing for a workload, XPU clients can tailor their computing hardware to their needs and only pay a slight premium to Broadcom for their design services rather than pay out the nose for some of Nvidia's GPUs.
NASDAQ: AVGO
Key Data Points
Broadcom's management team is incredibly bullish on this trend. They believe that the total addressable market for XPUs from just three clients will be between $60 billion and $90 billion by 2027. Two additional clients are slated to launch their XPUs by the end of the year, and two more clients have recently selected Broadcom as a partner to design their own XPUs.
This is a huge trend that investors can't ignore, but it isn't the end for Nvidia. GPUs still have a place in AI training and other use cases, and many cloud computing providers understand that their clients want access to GPUs because they are flexible.
However, XPU usage is expected to grow much faster than GPU usage, which suggests that Broadcom could potentially overtake Nvidia as the top AI hardware player over the next few years.
Personally, I own both stocks, as I believe there is still a huge market for GPUs and XPUs. If you made me pick one, I'd point to Broadcom as the outperformer over the next few years. But there may be one thing holding it back.
Broadcom's stock already has some success baked into it
Broadcom's stock is far from cheap, and it actually holds a premium to Nvidia because the market isn't blind to the rise of XPUs.
NVDA PE Ratio (Forward) data by YCharts
At nearly 36 times forward earnings, Broadcom's stock has a premium price tag. However, if there is a dramatic expansion of XPU usage, like management projects, today's stock price will be a fair price moving forward.
Investors must watch Broadcom's results to understand how its XPU business is faring. Still, all indications point toward XPUs being a major success, and investors would be wise to scoop up Broadcom shares before it takes off.
