Artificial intelligence (AI) stocks have become extremely popular following the release of OpenAI’s ChatGPT in late 2022. Their continuously rising prices have led to industry leaders such as Nvidia to implement stock splits, thereby making their shares more liquid and available to regular investors.
But Nvidia isn’t the only way to bet on this exciting new opportunity. Let’s take a look at why Broadcom (NASDAQ: AVGO) is another fast-rising AI stock split that belongs on your investing radar.
Is Broadcom the next Nvidia?
Formed by the 2015 merger between Broadcom Corporation and Avago TechnologiesBroadcom is a diversified semiconductor company that designs and manufactures a range of information technology hardware.
Unlike Nvidia, Broadcom is not a major player in the high-end, general-purpose market graphic processing units (GPUs) used to train and execute generative AI algorithms. Instead, it is gaining prominence in the industry through custom chips that are tailored to each customer’s specific use case.
For data centers, opting for a custom chip designed by Broadcom likely comes with more cost and commitment than buying off-the-shelf solutions like Nvidia’s H100. But the trade-off comes with cost and power benefits that could pay off in the long run.
Broadcom boasts major customers such as Alphabet (which has a contract with Broadcom to design its Google TPU chips) and Chinese social media giant Bytedance, which is reportedly looking to tap Broadcom’s services to help ensure a supply of powerful processors amid rising tensions with the U.S. government. Opting for Broadcom’s custom chips could help the Chinese company navigate tightening export controls that have effectively blocked many of Nvidia’s most advanced GPUs.
Non-AI related growth drivers
It’s never a good idea to all your eggs in one basket, especially if that basket is a megatrend in technology. While AI technology could transform the global economy, we don’t know when that will happen, or whether the current demand for AI chips is sustainable. Previous hype cycles, like the internet, ended badly for companies that exposed themselves too early.
The good news is that Broadcom’s business is diversified. It provides semiconductor services for industries ranging from smartphones to enterprise networking. And while these are mostly mature businesses, they help stabilize Broadcom’s business.
But the company also has an interesting growth engine that has nothing to do with AI: VMware. Completed in 2023The $69 billion deal was one of the largest in tech history, giving Broadcom more exposure to its infrastructure software business and helping the company’s total revenue rise 43 percent year over year to $12.49 billion in the second quarter.
Is Broadcom a bargain?
Despite the stock rising nearly 470% over the past five years, many smaller investors are finally starting to pay attention to Broadcom after management announced a 10-for-1 ratio stock split which could bring the four-digit stock price back down to earth when it goes live on July 15. Keep in mind that this move does not change the company’s market cap (the value of all outstanding shares) or its valuation relative to earnings.
The good news is that with a future price earnings ratio (P/E) of just 28, Broadcom’s valuation is in line with the Nasdaq average 31 and cheap compared to AI-related alternatives like Nvidia or Advanced micro deviceswhich have forward price/earnings ratios of 36 and 54 respectively. This means that the company remains a safer way to bet on the AI opportunity in the long run.
Should You Invest $1,000 in Broadcom Now?
Before buying Broadcom stock, here are some things to consider:
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, and Nvidia. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
Forget Nvidia: This AI Stock With Stock Split Could Be A Better Buy was originally published by The Motley Fool
