There are a lot of companies in the artificial intelligence (AI) space that are increasing their sales and earnings rapidly and providing a lot of value to their shareholders. Two that are achieving impressive results while carving out their niche in the AI market are Broadcom (NASDAQ: AVGO) and Nvidia (NASDAQ: NVDA).
Both have their strengths, but if you have to choose just one, which is the better AI stock? Let’s take a closer look to find out.
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Broadcom makes application-specific integrated circuits (ASICs) used in data centers to help some of the largest tech companies achieve generative AI capabilities. CEO Hock Tan said recently that his company is developing AI chips with three “very large” customers, each of which will deploy 1 million chips by 2027.
Also, a recent report said that ChatGPT creator OpenAI is working with Broadcom to help develop its own in-house AI chips.
All of this new demand from large tech companies comes on the heels of the company’s already impressive AI growth. Broadcom’s 2024 AI revenue soared 220% to $12.2 billion, and more could be on the way. Tan said on the fourth-quarter earnings call that the company believes the total market opportunity for Broadcom’s AI chips and AI networking infrastructure could be between $60 billion and $90 billion in fiscal 2027 alone.
That may sound like an exaggerated estimate from a company executive, but AI spending is soaring right now, with Goldman Sachs estimating tech companies will spend $1 trillion over the next few years to build out the AI infrastructure.
Nvidia is one of the most popular AI stocks right now because of its lead in the semiconductor space. The company’s graphics processing units (GPUs) have been used in data centers for years, and once tech giants began competing for generative AI dominance, the chips were even more in demand.
An estimated 70% to 95% of AI data centers are using the company’s GPUs, and this lead is making it very difficult for its rivals to catch up.
Management is working hard to maintain that lead by releasing new AI hardware like its Blackwell chips. Chief financial officer Colette Kress said “every customer is racing to be the first” to deploy the new chips in their data centers.
If you’re skeptical that Kress’ comments are just another executive touting their own products, results for the third quarter (which ended Oct. 27) prove her statement isn’t just all talk. Sales spiked 94% to $35.1 billion, and adjusted earnings increased 103% from the year-ago quarter to $0.81. Those results were fueled by a 112% increase in data center revenue to $30.8 billion.
Like Broadcom, Nvidia is benefiting from companies increasing their investment in AI infrastructure. And CEO Jensen Huang estimates these investments could reach $2 trillion over the next five years.
Many times when I compare two companies, it quickly becomes clear which one is the better buy. In this case, I think both stocks are great long-term AI investments. Broadcom and Nvidia are already tapping into the demand, and with spending increasing in the artificial intelligence sector, their lead in this space should continue to pay off for years to come.
But I would choose Nvidia if I had to pick just one to invest in right now. It has been a longtime leader in AI chips, but its forward price-to-earnings ratio (P/E) of 30.3 is slightly cheaper than Broadcom’s forward P/E of 35.3.
It’s worth noting that even with rising AI demand, there will still be some volatility with both of these stocks, especially as some investors inevitably cash in on some of the gains they have earned over the past few years.
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*Stock Advisor returns as of December 16, 2024
Chris Neiger has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Goldman Sachs Group and Nvidia. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
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