A Smart AI Stock to Consider Amid Nvidia's Dominance

Nvidia (NVDA) is currently the leading company in the market for data center graphics processing units (GPUs). These GPUs are essential for artificial intelligence (AI) tasks, including training and inference. It's estimated that Nvidia commands an impressive 90% share of this market, highlighting its dominance.

One of the best aspects of Nvidia's position is that it has substantially benefited investors over the past few years. This growth is mostly due to remarkable increases in both the company's revenue and earnings.

However, as Nvidia's stock price has soared, some investors may find it expensive. The company's price-to-sales ratio stands at 29, which is notably high compared to the average sales multiple of 8.2 in the U.S. technology sector. Additionally, Nvidia's price-to-earnings ratio is 54, which isn't cheap either.

Despite these high valuations, Nvidia's rapid growth allows it to justify its stock price. Furthermore, the expansive market potential that the company is tapping into suggests it can continue to affirm its valuation with strong performance in the future.

Interestingly, Nvidia is not the only AI semiconductor stock worth considering. There is another major player in the AI chip market that has been showing impressive growth recently, and its stock price is relatively more affordable than Nvidia's. This company recently announced its quarterly results, leading to a significant surge in its stock price.

Broadcom's Impressive Growth in the AI Sector

Broadcom (AVGO) recently released its fourth-quarter results for fiscal 2024, covering the period ending November 3. In this quarter, the company's revenue soared by 51% year over year, reaching $14 billion. Additionally, its non-GAAP earnings grew by 28% to $1.42 per share. Analysts had anticipated earnings of $1.39 per share, so Broadcom's performance was closely aligned with market expectations.

Excluding the revenue from its VMware acquisition completed in November 2023, Broadcom's organic revenue growth stood at 9%. The company projected a revenue of $14.6 billion for the first quarter of fiscal 2025, reflecting a 22% increase compared to the same period last year. Broadcom also expects its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) to account for 66% of revenue, up from 60% in the previous year's quarter.

AI has played a crucial role in driving Broadcom's revenue and earnings growth. The company concluded fiscal 2024 with AI-related revenue of $12.2 billion, a drastic increase from the $3.8 billion generated the previous year. Furthermore, Broadcom anticipates that its AI-related revenue will continue to rise significantly in the current fiscal year.

Specifically, Broadcom expects a 65% year-over-year increase in AI revenue for the current quarter, reaching $3.8 billion, which will comprise 26% of its overall revenue. AI is clearly becoming a substantial contributor to Broadcom's financial performance, and this trend is likely to endure given the vast market Broadcom is targeting for custom AI processors and networking chips.

The company's management reported that they see the addressable market for custom AI and networking chips could range between $60 billion and $90 billion by fiscal 2027. Even at the lower estimate, this presents a market opportunity that is five times larger than Broadcom's AI revenue in the last quarter.

Broadcom is strategically positioned to capture a significant portion of this market, as it is a leading player in the realm of custom chips, known as application-specific integrated circuits (ASICs). According to JPMorgan, Broadcom holds between 55% and 60% of this sector, paving the way for extremely rapid growth in its AI revenue over the next three years.

Potential for Stronger Earnings Growth

The positive results from Broadcom have led analysts to raise their growth expectations for the company. In the current fiscal year, which commenced last month, Broadcom's revenue is projected to climb by 19% compared to the previous year’s revenue of $51.5 billion. Furthermore, the company's earnings are expected to leap by 28% to $6.25 per share, significantly above last year’s growth rate of 15%.

However, there is a strong possibility that Broadcom could outperform these expectations, considering the extensive market potential and its dominant share within it. This suggests that Broadcom stock could maintain a strong upward trajectory into 2025 and well beyond, exhibiting healthy double-digit growth rates in the upcoming fiscal years.

Overall, Broadcom presents a compelling opportunity for investors. Its price/earnings-to-growth ratio (PEG ratio) is just 0.72, according to Yahoo Finance, based on expected earnings growth over the next five years. This is slightly lower than Nvidia's PEG ratio of 0.82.

For those seeking an alternative to Nvidia, Broadcom is worth considering. Its potential for growth, along with a more favorable price point compared to the projected earnings growth, makes it a strong candidate for your investment portfolio.

Nvidia, Broadcom, AI