This player says AI revenues are rising sharply.
Nvidia (NVDA 3.13%) has been a pretty sure bet for investors in recent years. The artificial intelligence (AI) chip giant has posted triple-digit earnings gains quarter after quarter, sending its shares soaring. Nvidia shares are up over 2,500% over the past five years and are heading for a rise of over 160% in 2024.
This all sounds great, but you might be wondering if this AI star will continue to soar higher in the coming months or if another AI player could offer you a better investment opportunity. A good example is Broadcom (AVGO 0.48%)a networking company that may be earlier in its AI growth story and offer greater potential for future profits.
Should you forget Nvidia and buy this AI stock now?
Image source: Getty Images.
Broadcom’s AI growth
Broadcom is a networking giant that sells thousands of products used in data center networking, home connectivity, smartphones and more. But lately, AI has emerged as a key growth area for the company, with Broadcom even saying in its latest earnings report that AI revenues “continue to grow strongly.”
In the quarter, Broadcom said demand from hyperscalers – or large-scale data centers – for AI networks and custom accelerators drove a 47% increase in revenue to more than $13 billion. Custom AI accelerators have more than tripled year over year, while Ethernet switching has grown fourfold, and optical lasers and dies used in optical interconnects have increased by three. Finally, PCI Express switches have more than doubled from last year.
Broadcom expects AI revenues to rise 10% to $3.5 billion in the fourth quarter and forecasts AI revenues of $12 billion for the year – up from a previous forecast of $11 billion. All this is happening as hyperscalers expand their AI clusters. Considering that the current AI market is expected to grow from $200 billion to $1 trillion by the end of the decade, this trend could continue.
In addition, Broadcom’s purchase of cloud computing company VMWare provides a new potential growth engine for the months and years ahead. The VMWare Cloud Foundation (VCF) is a complete software stack that virtualizes an entire data center for a customer. Recent bookings for VCF helped Broadcom achieve an annualized booking value of $2.5 billion during the quarter, up 32% from the previous quarter.
VMWare’s profitability goals
Furthermore, Broadcom is well ahead of VMWare’s profitability targets. When the company acquired VMWare last year, it targeted adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of $8.5 billion three years into the operation. Today, Broadcom says it will meet or beat that goal as early as fiscal year 2025.
Now let’s see if we should forget about Nvidia and turn to this growing AI player instead. Nvidia’s earnings are hard to beat these days, and given the company’s focus on innovation and overall growth expectations for the AI market, it could continue to deliver these top performances.
But Nvidia’s stock may not continue to rise in a straight line, and could stagnate or fall at some point. The shares don’t look expensive today at a forward earnings estimate of 46x given growth, but Broadcom, which also offers a solid growth story, looks cheaper.
AVGPO PE ratio (forward) data by YCharts.
Broadcom shares have risen in recent years. It performed so well that the company launched a 10-for-1 stock split earlier this year (like Nvidia) to bring the shares back to a level more accessible to a wider range of investors.
Broadcom’s double-digit share price gain this year still pales in comparison to Nvidia’s performance. This, together with a reasonable valuation, leaves plenty of room for the stock’s price to rise in the short term and over time. All of this means you shouldn’t forget Nvidia forever, but right now you might prefer to buy Broadcom and potentially benefit from the early days of this company’s AI growth story.
Adria Cimino has no positions in the stocks mentioned. The Motley Fool holds positions in and recommends Nvidia. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
