Nvidia Faces Competition from Broadcom in AI Chip Market
Complex tasks like training machine learning models require more than just traditional CPUs; specialized chips are essential to optimize performance.
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Broadcom’s Rising Threat to Nvidia
Broadcom (NASDAQ: AVGO) produces various semiconductor products, including Wi-Fi and Bluetooth chips found in Apple and Samsung smartphones. However, its significant focus lies in application-specific integrated circuits (ASICs) designed to enhance AI processes. Analysts believe Broadcom holds about 60% of the market for custom AI chips, thanks to strong ties with major data center companies.
Though Broadcom hasn’t named its customers, experts think they include tech giants like Alphabet, Meta Platforms, and ByteDance, the parent of TikTok. Expected revenues from these customers are projected to soar from $12.2 billion in 2024 to between $60 billion and $90 billion by 2027, indicating an annual growth rate of at least 70% and potentially reaching 95%.
This outlook spells trouble for Nvidia, as market share in AI accelerators could be shifting. Morgan Stanley analysts estimate ASICs may rise from 11% of AI accelerator sales in 2024 to 13% by 2027, potentially reaching 15% in 2030.
Broadcom’s Ambitious Plans and Nvidia’s Strengths
During a recent earnings call, Broadcom CEO Hock Tan revealed that two new hyperscalers are anticipated to begin contributing to revenue by 2027. While he did not disclose the names, analysts speculate they may be Apple and OpenAI.
Image source: Getty Images.
Despite the challenges posed by Broadcom, Nvidia maintains several competitive advantages. The costs associated with designing ASICs can be prohibitive; it requires substantial investment and large-scale orders, typically ranging from 250,000 to 500,000 units. Piper Sandler analyst Harsh Kumar estimates a single chip’s design cost at around $500 million, making it impractical for smaller firms.
Add to this the limited flexibility of custom chips, which are tailored for specific functions and lack comprehensive software support. In contrast, Nvidia offers a wide array of code libraries and pretrained models, easing the development process for users. Consequently, companies experimenting with ASICs might conclude that the expenses outweigh the advantages.
According to New Street Research’s Antoine Chkaiban, only two companies—Google and Amazon—have deployed custom AI silicon at scale. Nvidia is positioned to preserve its leading role in AI accelerators, with Bank of America projecting a market share increase to 75% by 2030, down slightly from 80% in 2024.
Looking Forward: Nvidia’s Bright Prospects
Wall Street anticipates Nvidia’s adjusted earnings will grow by 34% annually through fiscal 2027, which concludes in January 2027. This growth supports the current valuation of 53 times adjusted earnings, appearing justified for potential investors. Existing shareholders can remain optimistic about Nvidia’s future.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Bank of America is an advertising partner of Motley Fool Money. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Trevor Jennewine has positions in Amazon, Arista Networks, and Nvidia. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Arista Networks, Bank of America, Meta Platforms, and Nvidia. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
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