Since the launch of OpenAI’s ChatGPT in late 2022, generative artificial intelligence (AI) has taken the technology world by storm. Few companies have benefited more than hardware giants Nvidia (NASDAQ: NVDA) And Broadcom (NASDAQ:AVGO)who provide the data center equipment needed to support this fast-growing industry.
Business is good and both companies have initiated stock splits to keep their shares liquid and available to smaller investors. Let’s explore the long-term prospects of both companies while recognizing the potential challenges they may face in the short term.
Nvidia
After seeing its stock rise more than 3,500% in just five years, it’s no surprise that Nvidia relies on frequent stock splits to keep its stock price in check. The most recent was a 10-for-1 split, effective June 7, putting the stock at about $120 per share. And with the artificial intelligence industry in its early innings, Nvidia is still a long-term winner.
There is no shortage of grand projections for the future of AI. Bloomberg Intelligence believes the sector could be valuable whopping $1.3 trillion by 2032. And with an 80% market share in the advanced sector graphics processing units (GPUs) needed to power the large language models, Nvidia undeniably has a bright future from a demand perspective.
With a price-to-earnings ratio (P/E) of 51, Nvidia shares are also reasonably valued relative to their growth. First quarter sales increased 262% year after year to $26 billion, while net profit rose 628% to $14.9 billion.
That said, every new sector experiences growing pains. And with 87% of Nvidia’s revenue coming from data center hardware, the company is exceptionally vulnerable to any near-term slowdown in demand for AI chips, even if the long-term future remains bright.
Broadcom
With an unusually high stock price of $1,735 per share, Broadcom seemed overdue for a split when it announced a 10-for-1 swap that was expected to go live on July 15. Like Nvidia, the company’s shares have soared amid rising demand for AI hardware. However, the lower valuation and more diversified income streams could make it a safer way to bet on this opportunity.
While Nvidia is known for its general-purpose AI chips, Broadcom specializes in custom chips designed for its customer’s specific workloads. This niche allows the hardware to be more cost and energy efficient than mass market alternatives. And business is booming.
Second quarter revenue rose 43% year over year to $12.5 billion, helped by rising AI-related demand and the recent acquisition of VMware, a cloud computing company that focuses on virtual machineswhich one can run apps on software instead of physical computers. VMware helps Broadcom diversify into many different sides of the technology industry, protecting it from a potential slowdown in demand for AI chips.
With a price-to-earnings ratio of 37, Broadcom is also reasonably priced compared to Nvidia, which trades at 51 times forward earnings, even though the latter appears to have better growth prospects.
Remember: These stocks aren’t cheap
While stock splits can give the illusion of affordability, they can often indicate the opposite. A stock split usually occurs after a company has done so already experience an extreme price increase. So new investors aren’t exactly getting a bargain. That said, Nvidia and Broadcom still have what it takes to outperform the market in the long term.
In the near term, investors should consider the potential for volatility as the AI industry experiences growing pains, just as the Internet and other megatrends have done in the past. But between the two companies, Broadcom appears to be the safer choice due to its lower valuation and greater diversification.
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Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Nvidia. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
Nvidia vs. Broadcom: Which Rising Stock-Split AI Stocks Are the Best to Buy Now? was originally published by The Motley Fool
