Broadcom (NASDAQ:AVGO) has quickly become a key AI stock, with shares up almost 150 percent in the last year and the business now commanding an overall market cap of $1.7 trillion.
Understandably, Broadcom’s massive run as a maker of AI chips and networking equipment has drawn parallels to NVIDIA, a stock that has delivered incredible returns to shareholders who bought and held it.
Is Broadcom the next NVIDIA, and what are the risks and rewards that AVGO could offer investors in today’s market?
Broadcom’s Unique Play on AI
Much of the investment thesis behind NVIDIA hinges on its absolute dominance of the GPU market, a position it achieved through a combination of scale and the ubiquity of its proprietary CUDA ecosystem. Broadcom has been successfully able to take advantage of the same trends that have propelled NVIDIA to the top of the S&P without competing directly on the GPU front.
This opportunity stems from Broadcom’s focus on application-specific integrated circuits, or ASICs. These chips, which are more specialized and have less general-purpose functionality than GPUs, hold significant promise when it comes to the future development of AI.
With advantages in both efficiency and optimization for specific use case, ASICs could gradually become a major parallel solution to the advanced GPUs NVIDIA manufactures in the field of AI computing.
Furthermore, Broadcom can also take advantage of demand for AI connectivity solutions. Broadcom’s network technology, most notably its Jericho4 Ethernet fabric router, aims to enable distributed computing across multiple data centers.
This is likely to be a crucial area of AI development as ever more complex models demand more computing power than a single data center can reasonably supply. In addition to this cutting-edge approach to distributed computing, Broadcom’s networking technology also covers the more everyday tasks of connecting individual processing units within and between racks.
Between ASIC chips and networking hardware, the business has a long runway as AI hyperscalers keep building data centers and attempting to improve their efficiency. Broadcom’s energy-efficient chips could be particularly attractive to these hyperscalers, as energy costs and availability continue to be among the largest challenges facing large tech businesses investing in AI.
Broadcom’s chips may also present cost savings in the form of lower cooling requirements, as the advanced GPUs that NVIDIA is producing require expensive cooling that makes data centers even more costly to build.
Cumulatively, these factors add up to a decently strong investment thesis on Broadcom as a business that may very well establish its own market share within the AI hardware space without necessarily having to tackle NVIDIA head-on.
How Is Broadcom Looking?
Unsurprisingly for a stock that has skyrocketed in a short time span, Broadcom’s recent numbers have been nothing short of exceptional.
In the Q3 report, for instance, Broadcom reported overall revenue growth of 22 percent to $15.95 billion alongside net income of $4.14 billion.
Net income has been an especially positive area for Broadcom recently, as it has achieved strong profitability. As recently as the year-ago quarter, Broadcom lost $1.88 billion. Free cash flow for the quarter was also up markedly, rising 47 percent to a record high of $7.02 billion.
A key point in the recent report was a 63 percent increase in AI revenue, demonstrating the success that Broadcom is seeing as it expands its presence as an artificial intelligence major.
Semiconductor solutions made up 57 percent of Broadcom’s quarterly revenue, outpacing overall growth with a year-over-year expansion rate of 26 percent.
Looking forward to its fiscal Q4, Broadcom expects to deliver further growth to about $17.4 billion in revenue. Over the coming few years, analysts predict BRCM’s earnings per share will keep rising at an annualized rate of about 30%.
What Risks Does AVGO Carry?
Goldman Sachs recently warned that a slowdown has the potential to cause the S&P 500 to contract by as much as 20%, though the effects would likely be even more pronounced for a business like Broadcom whose value is tightly linked to the AI boom.
While a pullback among hyperscalers could be a major risk for Broadcom in the future, the tech giants at large haven’t yet started reducing their capex in a meaningful way.
Though Broadcom appears to have a good chance of justifying its price through strong ongoing growth, it’s also worth noting that the stock is trading at a fairly massive premium.
AVGO shares now trade at 94.3 times trailing 12-month earnings, 29.8x sales and 71.7x operating cash flow. At $369.57, the shares have also reached slightly above the analyst consensus price target of $360.20.
While AVGO still has room to run, especially over a long time horizon, the premium that the stock carries today may be a bit too high for some value-oriented investors.
Is Broadcom the Next NVIDIA?
Although Broadcom may never quite catch up to NVIDIA’s AI hardware dominance, it may very well follow a similar trajectory as a major beneficiary of ongoing investment in AI.
Broadcom’s focus on ASIC chips presents it with a unique opportunity to seize off a portion of the AI market that NVIDIA hasn’t established nearly as firm a position in.
The networking solutions, meanwhile, are likely to become increasingly valuable as more and more data centers are built and greater emphasis is placed on being able to distribute computing power between those centers.
Though there are risks associated with buying a high-flying stock whose value is heavily dependent on continued investment from AI hyperscalers, AVGO looks like it could be a good stock to buy and hold at the moment.
Even with a large premium baked into its pricing, Broadcom appears to be in a strong position to benefit from the ongoing development of AI.
The business’s chance to establish market share in a part of the market that NVIDIA hasn’t already locked up could make it an attractive pick-and-shovel play on artificial intelligence.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.