Nvidia (NVDA +2.71%) and Broadcom (AVGO +4.58%) have stamped their dominance on the artificial intelligence (AI) semiconductor market. Both chip designers are the dominant players in their respective AI chip niches, and that explains why they have been clocking solid growth.
The latest quarterly reports of Nvidia and Broadcom make it clear that the two companies are head and shoulders above their peers, such as Advanced Micro Devices and Intel, in AI chips. But if you have to buy one of these two semiconductor stocks right now to capitalize on the fast-growing AI chip market, which one should it be?
Let's find out.
Image source: Getty Images.
The case for Nvidia
Nvidia dominates the market for AI graphics processing units (GPUs) used in data centers for tackling AI workloads. Its graphics cards play an instrumental role in training large language models (LLMs), and the company's chips are now being deployed for AI inference applications as well. Jon Peddie Research estimates that Nvidia controlled a whopping 94% of the global GPU market at the end of the previous quarter. Nvidia's terrific grip over this market can be attributed to two factors.
First, the company has a technological advantage over its rivals. It shot into the limelight by providing its A100 GPUs for training ChatGPT three years ago, and it has regularly updated its offerings since then. The A100 was manufactured on the company's 7-nanometer (nm) Ampere platform. It then launched the H100 Hopper GPU based on a 5nm node, and it became a runaway hit for handling AI workloads.
NASDAQ: NVDA
Key Data Points
And now, its latest-generation Blackwell processors are said to be 2.5 times faster than the Hopper processors. Rival AMD has been playing catch-up, but it has been unable to make a significant dent in Nvidia's position so far.
This brings us to the second reason behind Nvidia's AI dominance. Its foundry partner TSMC allocates the largest chunk of its manufacturing capacity to Nvidia. TSMC manufactures chips for all the leading AI chip designers, including Broadcom, but third-party reports indicate that the foundry giant has reserved 70% of its advanced chipmaking capacity for Nvidia.
So, Nvidia is in a terrific position to cater to the massive AI chip market that's expected to generate $3.1 trillion in incremental revenue through 2030. Importantly, Nvidia's dominance is translating into impressive financial growth. The company generated $90.8 billion in revenue in the first six months of the current fiscal year, up by 62% from the year-ago period.
Analysts expect Nvidia to end fiscal 2026 with $206 billion in revenue, which would be a 58% jump from last year. The good part is that it can sustain its healthy growth levels in the long run, considering the multitrillion-dollar opportunity in the AI chip market as well as the company's ability to maintain its healthy share of this space. All this suggests that Nvidia can remain a top AI stock for a long time to come.
The case for Broadcom
Apart from GPUs, application-specific integrated circuits (ASICs) are also gaining solid traction in AI data centers. These chips can be customized to perform specific tasks, as opposed to GPUs, which are general-purpose computing chips. The custom nature of ASICs is the reason why they can perform the tasks they are programmed for with higher efficiency and power.
NASDAQ: AVGO
Key Data Points
Major cloud computing and AI companies are now investing significantly in custom AI processors to lower their operating costs, and most of them are tapping Broadcom to help them design these chips. Broadcom reportedly controls 70% of the ASIC market. This explains why its growth has been fantastic.
The company's AI revenue shot up 63% year over year in the previous quarter to $5.2 billion. This drove its overall revenue up by 22% year over year to $16 billion. Broadcom is on track to finish the current fiscal year with $20 billion in AI revenue, up from $12.2 billion in the previous year. Next year, its AI revenue is expected to more than double as per Wall Street analysts, and that won't be surprising, as it has started shipping its custom AI chips to a fourth customer.
OpenAI is touted to be Broadcom's latest customer for custom AI processors, placing a $10 billion order last quarter. Given that the company is engaged with another three cloud hyperscale customers for developing AI ASICs, there is massive room for Broadcom to grow its AI revenue in the long run.
After all, management pointed out earlier this year that its serviceable addressable market (SAM) from its first three hyperscale customers alone is going to be worth $60 billion to $90 billion in the next three years. The potential addition of new customers could increase that addressable opportunity and help Broadcom significantly multiply its AI revenue in the long run, considering its solid share of this space.
Not surprisingly, analysts have significantly bumped their revenue growth expectations.
Data by YCharts.
The verdict
Both Broadcom and Nvidia control a solid share of their respective AI chip niches, and that's why they are on track to clock remarkable growth. However, one of these two stocks is significantly cheaper than the other one.
Data by YCharts.
Nvidia's earnings multiples are lower than Broadcom's, and that's despite the fact that Nvidia's bottom line is growing at a much faster pace. Nvidia reported a 54% year-over-year increase in its earnings last quarter, much higher than the 36% growth reported by Broadcom. So, investors looking for a mix of value and growth could consider buying Nvidia right now.
But at the same time, Broadcom's healthy AI revenue pipeline could allow it to justify the premium it is trading at, which is why investors with a higher appetite for risk can consider adding this growth stock to their portfolios as well.
