The PHLX semiconductor sector The index has posted a healthy gain of almost 23% so far in 2024, which isn’t surprising as robust demand for artificial intelligence (AI) chips has been a driving force for this sector. However, not all companies have benefited from the rise in semiconductor stocks this year.
For example, shares of Broadcom (NASDAQ:AVGO) And Marvell technology (NASDAQ:MRVL) are up only 19% and 10% so far this year. This is despite the fact that both companies are witnessing a sharp increase in sales of the custom AI chips they produce.
However, it should come as no surprise that these companies are stepping on the gas thanks to the lucrative AI-focused market they serve. So if you had to choose between these two semiconductor stocks to ride the AI wave, which one should you buy? Let’s find out.
The case for Broadcom
The market for custom AI chips sold by Broadcom and Marvell is expected to grow rapidly. According to Morgan StanleyBy 2027, application-specific integrated circuits (ASICs) could account for 30% of the $182 billion AI chip market, indicating there could be a nearly $55 billion opportunity for Broadcom and Marvell.
The advantage for Broadcom is that it is the leading player in the ASIC market with an estimated 35% share, according to JPMorgan. This solid stock explains why Broadcom expects $10 billion in revenue from AI chip sales this year. It’s worth noting that revenue from Broadcom’s AI chips quadrupled year over year to $2.3 billion in the first quarter of fiscal 2024 (which ended on February 4).
The chipmaker has reportedly already built a solid customer base in the custom AI chip market, including those from Metaplatforms And Alphabet. Thanks to such customers, Broadcom’s AI revenues are expected to increase at least 2.5 times in 2024 compared to last year. More importantly, the growth of the custom AI chip market and Broadcom’s dominant position in this niche explain why AI revenues are expected to rise to $16 billion by 2025 and $20 billion next year, Melius said Research.
The improving contribution of AI chips is likely why analysts have increased their revenue expectations for Broadcom in the coming years, as shown in the chart below:
AVGO revenue estimates for current fiscal year data by YCharts.
However, the possibility of Broadcom exceeding Wall Street growth estimates cannot be ruled out. Melius Research analyst Ben Reitzes predicts that Broadcom’s AI revenues could even rise to $50 billion a year if the company can win one more customer for its custom chips. Sure, that seems like an ambitious number, but the great thing is that Broadcom has the ability to get closer to such a lofty goal.
The company added a new customer for its AI chips in March this year, with analysts pointing out that the new customer is Amazon, Apple, or ByteDance (the TikTok parent). Given that many companies are now building custom, in-house chips for AI workloads, it won’t be surprising to see Broadcom acquire a new customer in the future. As such, there’s a good chance that Broadcom could become a more prominent player in the lucrative AI chip market in the future.
The case for Marvell technology
We’ve already seen Broadcom and Marvell target an identical AI niche, with the former currently the leading player. This explains why Marvell expects its annual AI revenue to reach at least $1.5 billion in the current fiscal year. That would be significantly lower than Broadcom’s expected revenue from this segment.
Additionally, Marvell CEO Matt Murphy indicated during the company’s latest earnings conference call that it expects AI-related revenues to increase by at least $1 billion in the next fiscal year. That would bring the potential revenue from sales of AI chips to $2.5 billion next year. Aside from Marvell being a smaller player in the custom AI chip market, it’s worth noting that the company faces headwinds in enterprise networking, carrier infrastructure, consumer, and industrial/automotive markets.
These four segments together produced 30% of Marvell’s total revenue in the previous quarter. Furthermore, they were all down sharply year-over-year due to weak end-market demand. As a result, Marvell’s total quarterly revenue fell 12% year over year to $1.16 billion. By contrast, Broadcom reported organic revenue growth of 11% over the previous quarter, while revenue, including the VMware acquisition, rose 34% to nearly $12 billion.
The good thing about Marvell, however, is that its data center revenue increased 87% year over year to $816 million, thanks to demand for its AI chips. Add to that the fact that the company expects its beaten segments to begin to stabilize in the second half of the year, and it’s easy to see why analysts expect Marvell to deliver impressive growth starting next fiscal year.
MRVL revenue estimates for current fiscal year data by YCharts.
From one perspective, Marvell’s revenue is expected to decline 2% this fiscal year to $5.4 billion, followed by a 32% increase in the next fiscal year, and a 20% increase in the subsequent fiscal year. Meanwhile, as we saw in Broadcom’s revenue chart, revenue is expected to grow 14% next year and 10% the following year.
So while Marvell is a smaller custom AI chip player compared to Broadcom, the company is expected to achieve faster growth thanks to its smaller revenue base.
The verdict
Ultimately, we can say that Marvell’s smaller size means that AI could move the needle in a more meaningful way for the company and help it achieve faster growth than Broadcom. At the same time, investors should note that Marvell trades at 11 times sales, which is lower than Broadcom’s sales multiple of 15.
As such, Marvell Technology could deliver faster growth at a lower valuation, which is why it looks like the better AI stock of the two companies discussed in this article.
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JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, former director of market development and spokeswoman for Facebook and sister of Mark Zuckerberg, CEO of Meta Platforms, is a member of The Motley Fool’s board of directors. Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Amazon, Apple, JPMorgan Chase and Meta Platforms. The Motley Fool recommends Broadcom and Marvell Technology. The Motley Fool has a disclosure policy.
Better Artificial Intelligence (AI) Stock: Broadcom vs. Marvell Technology was originally published by The Motley Fool
