If you believe the hype, artificial intelligence (AI) is one of the most profound technological developments ever. This may be an exaggeration – only time will tell – but it is already clear that the technology has commercial power. Its impact on the market has been enormous, with the champion Nvidia (NASDAQ: NVDA)participate Apple And Microsoft as one of the largest companies in the world.
Nvidia’s rise led to the company splitting its stock 10-for-1, opening the door to more overpriced investors. Now, another AI company is splitting its stock, too. Broadcom (NASDAQ: AVGO)which designs, manufactures and sells hardware and networking infrastructure that enables AI programs to run, will split its shares later this summer.
So let’s think: can Broadcom deliver the kind of returns that Nvidia has?
Sales growth was impressive, but is being inflated by a major acquisition
Broadcom is in the growth phase and saw revenue increase by 34% in the first quarter compared to the previous year. Turnover in the second quarter of 2023 increased by 43% compared to the second quarter.
Are you noticing the huge recent increase? That turning point at the end of 2023 is important. This growth isn’t really organic; much of it comes from an acquisition. The company bought VMware, a highly successful cloud software company, in November 2023 for $69 billion, adding its revenue to that of Broadcom.
Excluding this additional revenue from VMware, the company’s revenue rose 12% year-over-year in the second quarter, not as dramatic as the eye-popping 43%.
Looking at future earnings, the company seems fairly valued
Still, 12% organic growth is nothing to dwell on and reflects Broadcom’s growing AI-focused business. Communication within the AI server farms that power platforms like ChatGPT is a crucial aspect and is where Broadcom shines. Its PCIe and Ethernet technology is one of the best on the market. This made his products popular.
Hock Tan, president and CEO of Broadcom, stated in the company’s latest earnings release that “revenue from our AI products reached a record $3.1 billion during the quarter.” The combination of a growing AI company and a solid acquisition means the company expects to continue generating record revenue. It raised its expectations for this year to $51 billion in revenue, a 42% increase from 2023.
So what does this mean for how fairly valued the company is? Looking at the forward price-to-earnings ratio, the company looks pretty solid at around 34. That’s in line with many of the big tech companies and is significantly lower than Nvidia’s 48.
Broadcom is a solid company, but it will struggle to compete with Nvidia
Broadcom’s growth prospects, while promising, just don’t compare to Nvidia’s in my opinion. Nvidia is growing revenue at a rate that far outpaces Broadcom’s and is doing so organically, without relying on expensive acquisitions. Consensus estimates are that Nvidia will deliver more than twice the revenue growth of Broadcom through the end of this fiscal year and next.
And this difference will be even greater if you look at the net income. Look at the difference over the past year.
It’s not just the takeover that affects this. Nvidia expects to operate with about 20% better margins than Broadcom this year.
Beyond the numbers, Nvidia showed immense vision as a pioneer in AI. Although it is difficult to quantify, I believe that visionary leadership is a factor that should not be underestimated. As the industry matures and competition becomes fiercer, Nvidia’s leadership can help it maintain its top position.
Ultimately, Broadcom is still a good investment with a solid track record and optimistic outlook. Is this the next Nvidia? I don’t think so, but it doesn’t have to be.
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Johnny Rice has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Apple, Microsoft and Nvidia. The Motley Fool recommends Broadcom and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
Another stock split is coming in the artificial intelligence (AI) space. Could Broadcom be the next Nvidia? was originally published by The Motley Fool
