Nvidia (NASDAQ: NVDA) has led the artificial intelligence (AI) boom that began with the launch of ChatGPT in November 2022. Its share price has advanced 895% since then, and Wall Street is still very bullish. Currently, 92% of the 62 analysts who follow Nvidia rate the stock a buy, and the median target price of $175 per share implies 30% upside from the current share price of $134.
However, billionaire Stanley Druckenmiller — a former hedge fund manager famous for achieving an annual return of 30% over a 30-year period — sold his entire stake in Nvidia in the third quarter. At the same time, he started a new position in Broadcom (NASDAQ: AVGO), another chipmaker that recently conducted a 10-for-1 stock split on the heels of tremendous share-price appreciation.
Interestingly, Druckenmiller had 14% of his portfolio in Nvidia just one year ago, which made it the largest holding at the time. Today, Druckenmiller no longer has any exposure to Nvidia, but Broadcom ranks among his top 15 holdings. Does he know something Wall Street doesn’t?
Nvidia is best known for its graphics processing units (GPUs), chips that perform technical calculations faster and more efficiently than central processing units (CPUs). That lets GPUs accelerate complex workloads, like training machine learning models and running artificial intelligence applications. Nvidia GPUs are the gold standard, with market share in AI accelerators exceeding 80%.
However, what truly sets Nvidia apart is vertical integration that spans hardware and software. The company pairs its GPUs with CPUs and networking equipment. CEO Jensen Huang says that full-stack approach lets Nvidia build data center systems with a superior total cost of ownership. Additionally, Nvidia offers the most robust collection of software development tools for accelerated computing in its CUDA platform.
The company launched CUDA almost two decades ago, and it now includes hundreds of code libraries and pretrained models that streamline application development across a range of disciplines, from robotics to drug discovery. While numerous chipmakers want to dethrone Nvidia as the leader in AI accelerators, doing so would not only require better chips, but also overcoming nearly two decades of software expertise.
Nvidia reported excellent financial results for the third quarter of fiscal 2025, which ended in October 2024. Revenue rose 94% to $35 billion, driven by 112% growth in data center sales and 72% growth in automotive and robotics sales. Meanwhile, non-GAAP earnings more than doubled to reach $0.81 per diluted share.
Looking ahead, Wall Street expects Nvidia’s adjusted earnings to increase 50% in the next four quarters. That makes the current valuation of 52 times adjusted earnings look quite cheap.
This begs the questions: Why did Stanley Druckenmiller sell his entire position? Does he know something Wall Street doesn’t?
The answer is no. Druckenmiller told Bloomberg in July that he made “a big mistake” by selling Nvidia.
Broadcom sells semiconductors and infrastructure software. Its chips have applications in Ethernet switches and routers, data center storage, and mobile devices. For instance, the company has long been the supplier of combined Wi-Fi and Bluetooth chips for Apple iPhones. Meanwhile, its software solutions span cybersecurity, mainframe observability, and virtualization.
Beyond wireless chips, Broadcom has secured a strong position in two other semiconductor categories. The company has 80% market share in networking chips and 60% market share in custom AI chips. Spending in both markets is forecast to grow at an annualized 20% to 30% in the next few years as businesses modernize their data center infrastructure.
Broadcom reported reasonable financial results in the fourth quarter of fiscal 2024, which ended in November 2024. Revenue increased 51% to $14 billion, and non-GAAP earnings increased 28% to $1.42 per diluted share. Having said that, the acquisition of virtualization specialist VMware added 40 percentage points to revenue growth, meaning organic sales increased just 11%.
However, management made two shocking statements on the earnings call. First, AI chip sales to its three unnamed hyperscale customers — analysts guess Alphabet‘s Google, Meta Platforms, and TikTok parent ByteDance — will increase at least fivefold in the next three years. Second, Broadcom believes it will soon add two more big customers — reportedly Apple and OpenAI — setting the stage for tremendous AI sales growth.
Looking ahead, Wall Street expects Broadcom’s adjusted earnings to grow 30% in the next four quarters. The consensus estimate makes the current valuation of 46 times adjusted earnings look reasonable, though not as attractive as Nvidia’s price tag. Investors should consider buying a small position in both stocks today.
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*Stock Advisor returns as of December 23, 2024
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Trevor Jennewine has positions in Nvidia. The Motley Fool has positions in and recommends Alphabet, Apple, Meta Platforms, and Nvidia. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
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