Nvidia Faces Challenges as Custom AI Accelerators Gain Momentum
Nvidia (NASDAQ: NVDA) has led AI investments since the sector’s resurgence in 2023. During this period, Nvidia’s stock surged over 800%, converting a $10,000 investment into more than $90,000. Few stocks have achieved such remarkable returns, especially to Nvidia’s scale.
However, Nvidia is encountering new challenges. The company has become the primary supplier of AI computing hardware, enabling it to charge premium prices for its graphics processing units (GPUs). This has significantly boosted Nvidia’s profit margins, prompting clients to explore alternatives like custom AI accelerators instead of GPUs.
Broadcom (NASDAQ: AVGO) is emerging as a key player in developing these custom AI accelerators—referred to as XPUs. A substantial market for this technology is anticipated, driven by companies eager to improve their AI training capabilities following insights gained since 2023.
Broadcom Anticipates Major Growth from XPU Products
While Nvidia’s GPUs are exceptional, effectively handling parallel calculations for various applications—including AI training and drug discovery—many features remain unnecessary for firms focused solely on AI training.
XPUs excel by optimizing for specific workloads. Clients can customize their hardware for unique needs while paying Broadcom a lower premium for design services, compared to Nvidia’s GPU prices.
Broadcom’s management is optimistic about this market shift. They project that XPUs from just three clients could reach a total addressable market of $60 billion to $90 billion by 2027. Additional clients are expected to unveil their XPUs soon, with more partnerships being established with Broadcom for custom designs.
Despite the growth potential for XPUs, Nvidia will still play a role in AI training and various uses. Many cloud providers recognize the demand for GPUs due to their versatility.
Nonetheless, XPUs are anticipated to grow at a faster rate than GPUs, suggesting Broadcom may eventually surpass Nvidia as the leading AI hardware provider.
I hold both stocks, viewing significant opportunities in both the GPU and XPU markets. However, I believe Broadcom might outperform Nvidia in upcoming years, though it faces a challenge.
Broadcom’s Stock Price Reflects Future Expectations
Broadcom’s stock commands a higher valuation than Nvidia’s, reflecting market enthusiasm for XPUs. Currently, it trades at nearly 36 times forward earnings, representing a premium investment.
If XPUs experience the rapid growth forecasted, today’s price could be justified over time. Investors should monitor Broadcom’s performance to gauge its success in the XPU market.
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Keithen Drury has positions in Broadcom and Nvidia. The Motley Fool has positions in and recommends Nvidia. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
The views expressed in this article reflect those of the author and do not necessarily represent Nasdaq, Inc.
