AI stock Nvidia (NASDAQ: NVDA) has been an incredible performer in recent years. Thanks to sky-high demand for its high-powered chips (GPUs), the company has become the largest business in the world with a market cap of over £4trn.
Recently, however, investors have been shifting their focus to another AI chip stock and that’s Broadcom (NASDAQ: AVGO). Could this be the next Nvidia?
Incredible AI growth
Recent news from Broadcom – which makes custom AI chips (it calls these ‘XPUs’) for large technology businesses – has certainly been exciting.
Earlier this month, the company told investors that it had just signed a fourth customer for its custom chips. This is believed to be ChatGPT owner OpenAI (the other three are believed to be Google, Bytedance, and Meta Platforms).
This new customer has recently put in $10bn worth of AI chip orders. As a result, Broadcom is expecting huge revenue growth in the near term.
This quarter, it expects AI chip revenue to be $6.2bn, 19% higher than last quarter. Next financial year (starting November), it expects AI chip revenue to climb by more than 60%.
These are incredible numbers. And it’s a little reminiscent of Nvidia a few years ago.
Has the horse already bolted?
Looking at the set-up, however, I’m not expecting Broadcom stock to multi-bag in the same way that Nvidia has in recent years, however. There are three reasons why.
The first is that the stock has already shot up spectacularly. Over the last three years, it has risen from around $50 to $360 – a gain of about 620%.
The second is that Broadcom is now a large company. Today, it has a market cap of $1.7trn, making it the eighth-largest company in the S&P 500 index.
Note that when Nvidia started to really motor back in early 2023, it was a much smaller company. Back then, it had a market cap of less than $400bn.
The third is that the company’s valuation now looks quite high. With Wall Street analysts expecting earnings per share of $9.06 next financial year, the price-to-earnings (P/E) ratio is about 40.
That’s not an outrageous earnings multiple. But I don’t think it leaves a lot of room for a significant upward re-rating.
Put all this together, and I don’t think Broadcom is likely to suddenly double or triple in the near term.
Of course, it could still perform well. If spending from existing XPU customers increases and/or the company manages to land more customers for its custom AI chips, we could see revenue and earnings soar.
It’s worth noting that on the recent earnings call, CEO Hock Tan said that in the future, XPU share at its major customers could be bigger than GPU share. In other words, the demand for custom AI chips could outstrip the demand for general-purpose chips designed by the likes of Nvidia.
To my mind, however, Nvidia is actually the better stock to consider buying right now. It trades at a lower valuation (its forward looking P/E ratio is only 28) and it has less customer concentration risk than Broadcom.
