Better Artificial Intelligence (AI) Stocks: Broadcom vs. Marvell Technology

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Both companies are targeting the same niche in the AI ​​chip market.

gave PHLX Semiconductor Sector The index has posted healthy gains of around 23% so far in 2024, and this is not surprising as strong demand for artificial intelligence (AI) chips has been a driver for the industry. However, not all companies have benefited from the rise in semiconductor stocks this year.

For example, shares of Broadcom (AVGO 0.38%) And Marvell Technology (MRVL -0.16%) So far this year, they are up just 19% and 10%, respectively. This is despite the fact that both companies are seeing rapid growth in sales of the custom AI chips they develop.

However, it wouldn't be surprising to see these companies step on the gas thanks to the lucrative AI-centric 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 of Broadcom

The market for custom AI chips sold by Broadcom and Marvell is expected to grow rapidly. According to Morgan StanleyApplication-specific integrated circuits (ASICs) could account for 30% of the $182 billion AI chip market by 2027, indicating a potential $55 billion opportunity for Broadcom and Marvell. Is.

The advantage for Broadcom is that it is the leading player in the ASIC market with an estimated share of 35%, according to JP Morgan. This solid part explains why Broadcom is expecting $10 billion in revenue this year from sales of AI chips. It's worth noting that Broadcom's AI chip revenue 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 clientele in the custom AI chip market, including Meta platforms And the alphabet. Thanks to such clients, Broadcom's AI revenue is expected to grow at least 2.5 times in 2024 compared to the previous year. More importantly, the growth of the custom AI chip market and Broadcom's dominant position in the space explain why its AI revenue will reach $16 billion in 2025 and $20 billion the following year, according to Melius Research. Hope to reach.

A better contribution from AI chips is probably why analysts have raised their revenue expectations from Broadcom for the next two years, as the chart below shows:

AVGO revenue estimates for current fiscal year data via YCharts.

However, the possibility of Broadcom exceeding Wall Street's growth estimates cannot be ruled out. Ben Ratties, an analyst at Melius Research, predicts that Broadcom's AI revenue could grow to $50 billion a year if it can land another customer for its custom chips. Of course, that sounds like an ambitious number, but the good thing is that Broadcom has the potential 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 either Amazon, apple, or ByteDance (TikTok parent). Considering that many companies are now building custom, in-house chips for AI workloads, it wouldn't be surprising to see Broadcom get another customer in the future. Thus, there is a good chance that Broadcom could become a more prominent player in the lucrative AI chip market in the future.

Marvel Technology Case

We've already seen Broadcom and Marvell targeting the same AI space where the former is currently the leading player. That explains why Marvell expects its annual AI revenue to reach, at least, $1.5 billion in the current fiscal year. This will be significantly lower than Broadcom's expected revenue from the segment.

Additionally, Marvell CEO Matt Murphy indicated on the company's latest earnings conference call that it expects AI-related revenue to grow by at least $1 billion in the next fiscal year. That would bring its potential revenue from AI chip sales to $2.5 billion next year. Aside from the fact that Marvell is a small player in the custom AI chip market, it's worth noting that it faces challenges in the enterprise networking, carrier infrastructure, consumer market, and industrial/automotive markets.

Together, these four segments generated 30% of Marvell's total revenue last quarter. In addition, all of them declined significantly on a year-on-year basis, at least due to end-market demand. As a result, Marvell's overall quarterly revenue fell 12% year-over-year to $1.16 billion. Broadcom, on the other hand, reported an 11% organic revenue increase last quarter, while its revenue, including the VMware acquisition, rose 34% to nearly $12 billion.

However, the good news for Marvell is that its data center revenue grew 87% year-over-year to $816 million thanks to demand for its AI chips. Throw in the fact that the company expects its beaten-down segments to start consolidating in the second half of the year, and it's easy to see why analysts are expecting impressive growth from Marvel next fiscal year. are

MRVL revenue estimates for current fiscal year data by YCharts.

For some perspective, Marvel's revenue is expected to fall 2% to $5.4 billion this fiscal year, followed by a 32% increase in the next fiscal year, and a 20% increase in the year ahead. Meanwhile, as we saw in the Broadcom revenue chart, its revenue is expected to grow 14% next year and 10% thereafter.

So, even though Marvell is a smaller custom AI chip player compared to Broadcom, the company is expected to grow faster thanks to its smaller revenue.

Decision

Finally, we can say that Marvell's smaller size means that AI can move the needle in a more meaningful way for the company and help it grow faster than Broadcom. At the same time, investors should note that Marvell is trading at 11 times sales, which is lower than Broadcom's sales multiple of 15.

As such, Marvell Technology can provide faster development at a cheaper price, which is why the two companies discussed in this article seem like the better AI stock.

JPMorgan Chase Motley Fool Company is an advertising partner of The Ascent. John Mackey, former CEO of Whole Foods Market, is a member of the board of directors of The Motley Fool, an Amazon subsidiary. Randy Zuckerberg, former director of market development and spokeswoman for Facebook and sister of MetaPlatforms CEO Mark Zuckerberg, 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 has positions in and recommends Amazon, Apple, JPMorgan Chase, and MetaPlatforms. The Motley Fool recommends Broadcom and Marvell Technology. The Motley Fool has a Disclosure Policy.

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