Nvidia is often heralded as the top artificial intelligence (AI) chipmaker, but Broadcom's (AVGO +1.19%) recent earnings report proved that it's gaining ground.
The numbers were great, and attractive growth rates are part of the reason why Broadcom has outperformed Nvidia year to date. AVGO shares are up by 49% in 2025 through market close Oct. 8, while NVDA stock has gained 41%.
However, a strong earnings report wasn't even the biggest news item that pushed Broadcom stock higher. The bigger catalyst is a $10 billion deal Broadcom reportedly struck with OpenAI. Broadcom will create custom chips for the client. This further demonstrates that tech giants are willing to diversify away from Nvidia for some of their AI chips.
Broadcom has the catalysts to rise higher, and it may continue to outperform Nvidia over the next few years.
Image source: Getty Images.
Profit margins continue to expand
Broadcom posted 22% year-over-year revenue growth in the fiscal third quarter -- which ended Aug. 3 -- and the strong top-line growth came with even better bottom-line growth. The AI chipmaker brought in $4.14 billion in net profits, resulting in a 26% net profit margin.
That's compared to a $1.9 billion net loss in Q3 FY24, which was due to a one-time, noncash tax provision of $4.5 billion. Broadcom's net profit margin has been trending higher, getting above 35% in the fiscal first quarter of this year.
Nvidia has been delivering 50%-plus net profit margins in recent quarters, suggesting Broadcom has more room to expand its margins. Rising revenue, combined with profit margin expansion, can present additional value to long-term investors.
Broadcom may look frothy to some investors with a 92 price-to-earnings ratio, while Nvidia sports a 50 P/E ratio. However, Broadcom has a price/earnings-to-growth (PEG) ratio of only 0.59, which is much lower than Nvidia's 1.32. The PEG ratio factors in a company's future growth potential when considering its current price and earnings. A stock with a PEG ratio under 1 is usually considered undervalued.
NASDAQ: AVGO
Key Data Points
Analysts rush to boost their price targets
Wall Street was enamored with Broadcom's results, with many rushing to hike their price targets. Mizuho analysts focused on Broadcom's AI revenue acceleration and projected that the company will generate $39 billion in fiscal 2026. The analysts also believe Broadcom's AI revenue can reach $60 billion in fiscal 2027 and $75 billion in fiscal 2028.
Those revenue projections give investors an idea of how bullish analysts have become due to Broadcom's recent earnings report. Any deals with additional tech giants or expanded contracts with existing partners can help Broadcom reach those revenue forecasts.
Broadcom's smaller market cap gives its an edge against Nvidia
Although Broadcom is one of the few corporations with a $1 trillion market cap, it still falls short of Nvidia's $4.3 trillion. There's almost a $3 trillion gap between them, but the smaller market cap works in Broadcom's favor.
It doesn't require as much to move a stock with a $1.7 trillion market cap as it does to generate price swings for one with a $4.3 trillion market cap. That's part of the reason Broadcom has outperformed Nvidia year to date, even though Nvidia has a higher revenue growth rate.
However, it's also easier for investors to put downward pressure on a $1.7 trillion company than a $4.7 trillion company.
Any slowdown in AI spending can hurt Broadcom, and if more AI chipmakers gain market share, it can impact Broadcom's future profit margins. However, analysts' revenue forecasts and rising AI spending suggest the current rally can continue.
I think Broadcom has a real shot at outperforming Nvidia in 2026. Is it the next Nvidia. We'll have to wait to se.
