Better Artificial Intelligence Stocks: Broadcom vs. Nvidia

Among the companies benefiting from artificial intelligence (AI) going mainstream are semiconductor giants Broadcom (NASDAQ:AVGO) And Nvidia (NASDAQ: NVDA). The advent of AI resulted in a massive increase in revenue for both companies and customers looking for the necessary hardware and software to implement AI in their organizations.

As a result, Broadcom stock shot up to a 52-week high of $186.42 in October, a dramatic change from a low of $90.31 in December last year. Nvidia also saw its stock rise over the past year, from December’s 52-week low of $45.01 to a high of $152.89 on November 21.

Both remain positioned to continue to benefit from AI-related demand, which shows no signs of abating. According to industry forecasts, the AI ​​market will experience multi-year growth from approximately $184 billion this year to more than $826 billion by 2030.

With Broadcom and Nvidia both doing well, is it a better investment to take advantage of the growing AI market? Here is a comparison of the two so you can arrive at an answer.

Broadcom’s AI approach

Broadcom’s ability to meet the demand for AI lies in its extensive semiconductor business. It offers a range of products for tech industries such as computer networking, storage and broadband.

So it’s understandable that the rise of AI has driven revenue growth for the company. In the third fiscal quarter ended August 4, Broadcom posted revenue of $13.1 billion, up 47% year over year.

Network hardware in particular benefited from demand for AI, as sales in this area rose 43% year over year to $4 billion. But weakness in non-AI related sales meant the division’s overall third-quarter revenue growth was just 5% year-over-year to $7.3 billion.

Broadcom’s other key business, IT infrastructure management software, grew a whopping 200% year over year to $5.8 billion thanks to the company’s acquisition of VMware last November. The VMware Cloud Foundation (VCF) platform allows Broadcom customers to set up a private AI.

Private AI protects customer data from use by AI other than those designated by customers. Broadcom tackling the emerging private AI market is proving to be a masterful strategy. Customer demand for the technology led to VCF accounting for more than 80% of VMware’s product bookings in the third quarter.

Nvidia’s AI success

Nvidia has been one of the biggest beneficiaries of the AI ​​push due to its focus on accelerated computing. This type of computer architecture processes data-intensive tasks separately from the work handled by a CPU, making it ideal for complex technology like AI.

Nvidia championed accelerated computing with the creation of its graphics processing unit (GPU) in 1999. The company is now recognized as the global leader in GPUs, with some estimates putting its market share at 80%.

Results for the fiscal third quarter ended October 27 proved that the company remains a leader in accelerated computing. The company posted record revenue of $35.1 billion in the third quarter, up 94% from the previous year.

The company expects this revenue growth to continue in the fourth quarter, with revenue estimated at approximately $37.5 billion. That’s a 70% increase from last year’s $22.1 billion.

Nvidia will likely continue to see sales rise due to demand for AI. According to CEO Jensen Huang, “AI is transforming every industry, every company and every country.” To his point, Denmark and Japan were using Nvidia products to build AI supercomputers.

Choosing between Broadcom and Nvidia stocks

With Broadcom and Nvidia both seeing success in their AI-related offerings, deciding which is the best AI investment isn’t easy. One consideration is to look at the diluted earnings per share (EPS) for each company.

Data per YCharts.

As the chart shows, Nvidia’s earnings per share skyrocketed as demand for AI exploded in 2023, while Broadcom’s fell. Over the last three fiscal quarters, Broadcom’s net income fell to $1.6 billion from $10.6 billion in the previous year as it faced higher costs related to its VMware acquisition.

Another factor to consider is the price-to-earnings (P/E) ratio for each company. This metric tells you how much investors are willing to pay for each dollar of income, helping you assess a stock’s relative value.

Data per YCharts.

Broadcom’s price-to-earnings ratio has increased compared to Nvidia at the time of writing this article. This suggests that Nvidia stock is the better value at the moment. Between Broadcom and Nvidia, the latter’s lower price-to-earnings ratio and higher earnings per share, combined with its leading position in accelerated computing, means Nvidia is the superior AI stock to buy and hold for the long term.

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Robert Izquierdo has positions at Nvidia. The Motley Fool holds positions in and recommends Nvidia. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.