Battle for AI Chip Market: AMD vs. Broadcom

In the world of artificial intelligence (AI) chip stocks, Nvidia (NASDAQ: NVDA) reigns supreme, yet rival companies are making significant efforts to capture some of its market share. Strong competitors like Advanced Micro Devices (NASDAQ: AMD) and Broadcom (NASDAQ: AVGO) are emerging contenders fighting for a stake in the AI infrastructure market.

The AI Infrastructure Market Overview

AMD and Broadcom are implementing distinct strategies to carve out their positions in AI infrastructure amid Nvidia’s dominance. Both companies have reported substantial growth driven by AI demand.

AMD currently ranks second in the graphics processing unit (GPU) market, trailing Nvidia significantly. Despite owning a 10% to 17% share of the GPU market, AMD faces substantial competition, as Nvidia commands over 80%.

A major drawback for AMD is its comparatively weaker software platform. AMD launched its ROCm (Radeon Open Compute) software about ten years after Nvidia debuted its CUDA platform. Research by semiconductor firm SemiAnalysis indicates that AMD’s GPUs are often ineffective for AI training straight out of the box due to software compatibility issues.

Despite these hurdles, AMD’s GPUs have found application in AI inference and are utilized when Nvidia chips are unavailable. Additionally, AMD has secured a significant position in the Central Processing Unit (CPU) data center market, a sector that, while smaller, is expanding rapidly alongside AI infrastructure growth.

Image source: Getty Images.

Conversely, Broadcom adopts a different approach, focusing not on GPUs or CPUs but on assisting customers in designing custom AI chips, known as ASICs (application-specific integrated circuits). Although these chips are less adaptable than GPUs and require more time and investment to develop, they excel in specific tasks and are more energy-efficient.

Broadcom also contributes to the networking aspect of AI infrastructure by manufacturing components essential for data flow management, including Ethernet switches and network interface cards (NICs). These components are vital to distributing AI workloads across servers.

The most promising opportunity for Broadcom lies in its custom AI chip market strategy. Currently, the company is engaged with seven customers in various phases of chip development. For its three most advanced clients, Broadcom anticipates a serviceable market potential of $60 billion to $90 billion by fiscal year 2026 (ending October 2026) as these customers scale to AI chip clusters comprising 1 million chips. Although Broadcom will not capture the entire market, as some business will likely go to Nvidia, this represents significant potential. Future customer additions could further enhance revenue growth.

Last quarter, AMD reported a 69% rise in data center revenue to $3.9 billion, while Broadcom’s AI-related revenue climbed 77% to $4.1 billion. Despite similar growth rates, Broadcom appears to possess greater potential for future expansion, particularly in the custom AI chip arena, providing a strong advantage over AMD, which continues competing primarily in the GPU market.

Stock Valuations and Recommendations

In terms of stock valuation, AMD is the more affordable option, trading at a forward price-to-earnings (P/E) ratio of approximately 22, compared to Broadcom’s 28.6.

Data by YCharts.

Both companies demonstrated similar revenue growth last quarter, with AMD achieving a 24% year-over-year increase and Broadcom witnessing a 25% jump. However, Broadcom’s prospects in the custom AI chip market seem more promising.

Considering the recent market downturn, I find both AMD and Broadcom to be strong stock opportunities. AMD is well-positioned in the data center CPU market and is expected to sustain growth in its GPU segment, particularly as AI inference gains importance. Nonetheless, I favor Broadcom due to its exciting potential within the custom AI chip landscape.

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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices and Nvidia. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.