Artificial intelligence (AI) stocks exploded in popularity after the release of OpenAI's ChatGPT in late 2022. Their ever-increasing prices made industry leaders Nvidia To implement stock splits, to make 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 find out why. Broadcom (NASDAQ: AVGO ) is another growing AI stock division that should be on your investment radar.
Formed by the 2015 merger between Broadcom Corporation and Avago Technologies, Broadcom is a diversified semiconductor company that designs and manufactures an array of information technology hardware.
Unlike Nvidia, Broadcom is not 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 gains industry exposure through custom chips developed for each client's specific use case.
For data centers, choosing a custom chip designed by Broadcom probably has higher costs and commitments than buying an off-the-shelf solution like Nvidia's H100. But the trade-off comes with cost and power advantages, which can pay off in the long run.
Broadcom big name clients eg the alphabet (which contracts with Broadcom to design its Google TPU chips) and Chinese social media company Bytance, which aims to help secure a supply of powerful processors amid rising tensions with the US government. To use Broadcom services. Broadcom's choice of custom chips could help the Chinese company tighten export controls that effectively block many of Nvidia's latest GPUs.
It's never a good idea to put all your eggs in one basket—especially if that basket is a hip up-tech megatrend. While AI technology could transform the global economy, we don't know when that will happen, or if the current demand for AI chips is sustainable. Previous hype cycles like the Internet ended badly for companies that overexposed themselves too early.
The good news is that Broadcom's business is diverse. The company provides semiconductor services for industries ranging from smartphones to enterprise networking. And while these are essentially mature businesses, they help stabilize Broadcom's operations.
But the company also has an interesting non-AI growth driver, VMware. Due in 2023, the $69 billion deal was the largest in tech history. That gave Broadcom more exposure to the infrastructure software business and helped the company post a 43 percent year-over-year increase in revenue to $12.49 billion in the second quarter.
Despite shares jumping nearly 470% over the past five years, many small investors are finally taking notice of Broadcom after management announced a 10-for-1 stock split that will quadruple when it goes live. Digits can bring stock prices back down to earth. July 15. Note that this move will not change the company's value in terms of market cap (the value of all outstanding shares) or earnings.
The good news is that with a forward price-to-earnings (P/E) of just 28, Broadcom's valuation is in line with that. Nasdaq 31 average and cheaper than AI-related alternatives such as Nvidia or Advanced Micro Devices, which lead to forward P/Es of 36 and 54, respectively. That means the company is a safe bet on the long-term AI opportunity.
Before buying stock in Broadcom, consider this:
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Suzanne Frey, an Alphabet executive, is a member of The Motley Fool's board of directors. Will Ebbing No positions in any of the stocks mentioned. The Motley Fool has positions and recommends Advanced Micro Devices, Alphabet, and Nvidia. The Motley Fool recommends Broadcom. The Motley Fool has one Disclosure Policy.
Forget Nvidia: This Stock Split Could Make AI Stocks Better Buys Originally published by The Motley Fool