Nvidia (NASDAQ: NVDA) soared to become the world’s first trillion-dollar chipmaker in 2023, and its current valuation sits at a staggering $1.8 trillion, representing an astounding gain of 1,810% in just five years. The catalyst behind Nvidia’s historic ascent stems from the exponential growth of the artificial intelligence (AI) market, driving robust sales of its high-end data center GPUs designed for AI processing tasks.
Amidst Nvidia’s multibagger gains, a pressing question arises – could Broadcom (NASDAQ: AVGO) – which has rallied nearly 350% over the past five years and is currently valued at approximately $590 billion, chart a similar trajectory and emerge as the next hot contender in the chipmaker landscape by the end of this decade?
Image source: Getty Images.
Understanding the Diverse Landscape of Broadcom and Nvidia
Broadcom operates as a more diversified entity compared to Nvidia. Its chipmaking business spans across a wide array of wireless, networking, optical, data storage, and industrial chips. Additionally, its software segment offers infrastructure, cloud, and cybersecurity services.
In the fiscal year 2023, Broadcom derived 79% of its revenue from its chipmaking business and the remaining 21% from its software division. Notably, it secured a significant portion of its total revenue from a strategic alliance with Apple, which holds a multiyear agreement for the purchase of wireless, radio frequency, and mobile chips from Broadcom.
Despite appearing slightly reliant on the cyclical chipmaking market and Apple’s orders, Broadcom anticipates that its recent acquisition of cloud behemoth VMware will catalyze the expansion of its software segment to encompass about half of its total revenue. Parallel to Nvidia, Broadcom anticipates leveraging the long-term growth potential of the generative AI market, which accounted for 20% of its semiconductor revenue in the fourth quarter of fiscal 2023 — to fuel its sustained expansion.
In contrast, Nvidia operates on a more streamlined business model. In its most recent quarter, approximately 80% of its revenue originated from its burgeoning data center division. The gaming GPU business contributed 16% to its revenue, while the remaining 4% was attributed to professional visualization, automotive, and OEM chips. Notably, both Broadcom and Nvidia function as “fabless” chipmakers, outsourcing their production to third-party foundries like Taiwan Semiconductor Manufacturing.
Broadcom’s Growth Trajectory in Comparison to Nvidia
A captivating historical context underscores that the present-day Broadcom was initially named Avago Technologies until 2016. In that year, Avago acquired the original Broadcom, inheriting its more entrenched brand.
Prior to acquiring Broadcom, Avago embarked on a spree of substantial acquisitions. Even after rebranding as the “new” Broadcom, it continued to augment via significant acquisitions, procuring CA Technologies, Symantec’s enterprise security unit, and VMware to fortify its software business.
Through both organic growth and strategic acquisitions, Broadcom managed to elevate its annual revenue at a compound annual growth rate (CAGR) of 15% from fiscal 2016 to fiscal 2023. Simultaneously, its adjusted earnings per share (EPS) surged at a CAGR of 21%. Analysts anticipate a continued upward trajectory, forecasting that from fiscal 2023 to fiscal 2026, its revenue and earnings will burgeon at CAGRs of 19% and 18% respectively, as it integrates VMware and persists in expanding both its chipmaking and software divisions.
By comparison, Nvidia achieved a more accelerated pace of growth, with its revenue and adjusted EPS spiraling upwards at a CAGR of 21% and 23% respectively from fiscal 2017 to fiscal 2023 (which concluded in January). Analysts project that from fiscal 2023 to fiscal 2026, its revenue and earnings will escalate at a CAGR of 61% and 133% severally, fostering the flourishing AI market.
Broadcom: A Promising Growth Stock
While we should approach these estimations with caution, it’s apparent that Nvidia is on track to outpace Broadcom in terms of growth for the foreseeable future. Broadcom, however, adopts a strategy geared towards sustaining stable double-digit revenue and earnings growth from its diversified portfolio, rather than relentlessly pursuing rapid expansion from a narrower spectrum of chips, a tactic synonymous with Nvidia.
Nevertheless, Broadcom underpins the potential to emerge as a trillion-dollar chipmaker by the conclusion of this decade if it maintains its present valuation and growth rates. At its current valuation, Broadcom presents an attractive investment proposition, trading at just 27 times forward earnings. If it upholds this valuation, fulfills analysts’ projections, and sustains a stable CAGR of 15% from fiscal 2026 to fiscal 2030, it stands well-poised to surpass a market cap of $1.2 trillion by the end of this timeframe.
Consequently, while Broadcom might not garner the same level of spotlight as Nvidia, it undeniably ranks among the select few promising chipmakers capable of mirroring Nvidia’s trajectory into the trillion-dollar echelon.
Would you invest $1,000 in Nvidia right now?
Before delving into Nvidia stocks, it’s crucial to note that the Motley Fool Stock Advisor analyst team recently pinpointed what they believe to be the 10 best stocks for investors to buy at present – with Nvidia not making the cut. The 10 highlighted stocks exhibit the potential to deliver substantial returns in the upcoming years.
The Stock Advisor service equips investors with a straightforward roadmap to success, encompassing guidance on portfolio construction, regular insights from analysts, and two fresh stock picks each month. Since 2002, the Stock Advisor service has consistently outperformed the S&P 500, tripling its return*
Discover the 10 stocks
*Stock Advisor returns as of February 12, 2024
Leo Sun holds positions in Apple. The Motley Fool holds positions in and advocates for Apple, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool endorses Broadcom. The Motley Fool adheres to a strict disclosure policy.
The perspectives and opinions expressed are solely those of the author and do not necessarily reflect the views of Nasdaq, Inc.
