Artificial intelligence (AI) stocks exploded in popularity following the release of OpenAI’s ChatGPT in late 2022. Their steadily rising prices have led industry leaders like Nvidia to conduct stock splits, seeking to make their shares more liquid and accessible to regular investors.
But Nvidia isn’t the only one who can capitalize on this exciting new opportunity. Let’s see why. Broadcom (NASDAQ:AVGO) is another fast-growing AI stock split that needs to be on your investing radar.
Formed by the 2015 merger of Broadcom Corporation and Avago Technologies, Broadcom is a diversified semiconductor company that designs and manufactures a range of computer hardware.
Unlike Nvidia, Broadcom isn’t a major player in the market for high-end, general-purpose graphics processing units (GPUs) used to train and run generative AI algorithms. Instead, it’s making its mark in the industry with custom chips tailored to each customer’s specific use case.
For data centers, opting for a custom chip designed by Broadcom likely involves more upfront costs and commitments than buying off-the-shelf solutions like Nvidia’s H100. But that tradeoff comes with cost and power advantages that can pay off in the long run.
Broadcom’s high-profile customers include: Alphabet (which has signed a contract with Broadcom to design its Google TPU chips) and Chinese social media giant Bytedance, which is reportedly looking to use Broadcom’s services to secure supplies of powerful processors amid growing tensions with the U.S. government. Switching to Broadcom’s custom chips could help the Chinese company navigate tighter export controls that effectively block many of Nvidia’s most advanced GPUs.
It’s never a good idea to put all your eggs in one basket, especially if that basket is a hot tech megatrend. While artificial intelligence could transform the global economy, we don’t know when that will happen, or whether the current demand for AI chips is sustainable. Previous buzz cycles, like the internet’s, have ended badly for companies that got too exposed too early.
The good news is that Broadcom’s businesses are diversified. The company provides semiconductor services for industries ranging from smartphones to enterprise networks. And while these are mostly mature businesses, they help stabilize Broadcom’s operations.
But the company also has an exciting, non-AI growth engine in VMware. The $69 billion deal, which closed in 2023, was one of the largest in tech history. It gave Broadcom greater exposure to the infrastructure software sector and helped push the company’s overall revenue up 43% year over year to $12.49 billion in the second quarter.
Despite a stock rally of nearly 470% over the past five years, many retail investors are finally starting to pay attention to Broadcom after management announced a 10-for-1 stock split that could bring its stock price back down to four digits when it launches on July 15. Keep in mind that this move doesn’t change the company’s market capitalization (the value of all outstanding shares) or its valuation relative to earnings.
The good news is that with a forward price-to-earnings (PE) ratio of just 28, Broadcom’s valuation is in line with Nasdaq average of 31 and cheap compared to AI-related alternatives like Nvidia or Advanced microsystemswhich have forward P/Es of 36 and 54 respectively. This means the company remains a safer bet on the long-term opportunity of AI.
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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 Split Could Be a Better Buy was originally published by The Motley Fool
