NVIDIA (NASDAQ:NVDA) and Broadcom (NASDAQ:AVGO) are two of the hottest AI stocks in today’s market. Both have seen their stock prices soar alongside investment in AI infrastructure, and analysts expect both of them to continue growing at brisk paces through the remainder of this decade.
This brings up the interesting question of which stock is best between NVIDIA and Broadcom. Today, we compare these two stocks to see which one is the better investment at the moment.
NVIDIA
As the main manufacturer of the GPUs that provide the processing power required by AI, NVIDIA has been a go-to for many investors looking for high-growth opportunities over the last two years. NVIDIA accounts for approximately 80% of the market for AI chips.
Although competitors are racing to grab off their own share of the growing market, analysts expect NVIDIA to remain the dominant force in AI hardware for the foreseeable future thanks to its strong early lead and the ecosystem that has sprung up around its chips.
This leading market position has led to massive growth on both NVIDIA’s top and bottom lines. Quarterly revenues have nearly tripled since mid-2023 alone, and year-over-year revenue growth rates remain in the high double digits. A similar trend has prevailed in terms of the company’s earnings per share, which are currently at more than 10 times their levels as recently as early 2023.
One of NVIDIA’s strongest suits is its remarkably strong profitability. The last 12 reported months have seen the GPU giant deliver a net margin of 55.9%, a return on invested capital of 107.1% and a return on equity of 123.3%. All of these metrics are extremely impressive and underline just what a high-quality business NVIDIA has become in the age of heavy AI investment.
NVDA shares still trade at a premium valuation, but it’s worth noting that they actually look more reasonable now than they did early on in the AI boom. Today, NVIDIA is priced at 45.7 times earnings and 25.5 times sales. The stock spent much of 2023 trading in triple-digit P/E territory, and ratios of under 50 times earnings have been fairly uncommon during this decade.
Considering how much NVIDIA has grown as the AI market has exploded, the stock actually looks a good bit more attractive from a valuation perspective than it has for most of the last several years.
Analysts also believe that the stock still has more room left to run. The broad view is NVDA will hit $163 per share, suggesting upside of over 21% from the most recent price of $134.38.
Broadcom
While NVIDIA is the most popular pick-and-shovel play on AI, a very similar investment thesis can be put together in Broadcom’s favor. As a manufacturer of semiconductor and networking solutions as well as a software provider, Broadcom stands to benefit from heavy investment in AI infrastructure in much the same way as NVIDIA.
With AI still in its early stages and data center investment expected to continue at a red-hot pace for the next several years, Broadcom could be in for a very positive period ahead.
It has already seen strong growth resulting from AI demand, as its revenues have surged from a little under $12 billion in 2023 to nearly $15 billion in 2024.
Even before AI came along to send Broadcom’s growth skyrocketing, the company had proven to be remarkably durable when it came to delivering revenue growth. In the last 15 years, Broadcom has incredibly reported only a single quarter of year-over-year revenue decline.
In terms of both valuation and profitability, however, Broadcom falls a bit short of the standard set by NVIDIA. Shares of AVGO currently trade at about 111x earnings and 20 times sales. Analysts project a consensus target price of $239.25, implying an upside of just 3.3% from the most recent price of $231.68.
Although Broadcom’s profitability is very respectable, it still lags quite a long way behind NVIDIA. On a trailing 12-month basis, Broadcom has delivered a net margin of 18.5%, a return on equity of 14.7% and an ROIC of 7.2%.
To some degree, these negatives are balanced out by the fact that Broadcom is the undisputed winner when it comes to its ability to produce dividend income. Broadcom currently yields nearly 1%, paying $2.11 per share annually. NVIDIA, by comparison, has a yield of just 0.03%. As such, Broadcom is likely the more attractive choice for investors looking for a balance of both AI-driven growth and consistent dividend income.
NVIDIA vs Broadcom Stock: Which Is Best?
Both NVDA and AVGO trade at premium valuations, but investors are paying less than half the premium for NVIDIA today that they are for Broadcom. As a result, although Broadcom and NVIDIA are both likely good stocks to own as AI continues to heat up, NVIDIA seems to stand out between the two.
Considering that NVIDIA already has a significant edge when it comes to profitability, it seems that AVGO buyers are being asked to pay a higher premium on the strength of less certain future performance.
Perhaps the final point in favor of NVIDIA is the expected earnings growth rate for each company. Over the next five years, NVIDIA’s earnings per share are expected to increase at an annualized rate of about 35%. Broadcom’s growth rate over the same period is projected at 20%.
While both of these growth rates are extremely positive, this seems to solidify NVIDIA as the better value. NVDA is priced not only at a lower multiple to its current earnings but also to its expected earnings growth through the rest of this decade.
It bears repeating, however, that both AVGO and NVDA look quite appealing as AI investments. AVGO also holds a strong advantage where dividends are concerned, potentially making it more suitable for investors prioritizing immediate income. For most investors, however, NVIDIA looks like it’s probably the better buy between these two attractive stocks at the moment.
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.
