Nvidia vs. Broadcom: A Comparative Analysis of AI Chip Leaders
In the rapidly evolving realm of semiconductor chips that drive artificial intelligence (AI) workloads, two companies stand out: Nvidia (NASDAQ: NVDA) and Broadcom (NASDAQ: AVGO). While Nvidia has emerged as a leading player in AI chip technology, Broadcom is steadily gaining traction in the market.
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Diverse Strategies in the AI Chip Market
Nvidia and Broadcom are adopting distinct strategies to capture market share in the AI chip landscape. Nvidia leads the market in graphics processing units (GPUs), claiming over an 80% share. GPUs, initially designed for enhancing graphics in video games, have evolved to become the primary choice for powering AI workloads due to their superior processing capabilities.
A key advantage for Nvidia is its CUDA software platform, which pioneered the ability for developers to utilize GPUs for a variety of tasks beyond graphics. It has set the standard for GPU programming, facilitating the creation of libraries and tools under the CUDA X umbrella that significantly enhance the efficiency and scalability of AI model training as well as improve inference times.
In contrast, Broadcom specializes in assisting customers in creating custom AI chips known as application-specific integrated circuits (ASICs). ASICs are tailored for specific tasks, allowing for enhanced performance and reduced power consumption compared to standard GPUs. However, the design and development of these custom chips entail substantial time investments and high initial costs, and they lack the versatility offered by GPUs.
As the AI infrastructure demand surged, Nvidia’s GPUs dominated the market, with hyperscalers (operators of large data centers) preferring them for training AI and expanding their data center capabilities. The wide availability of these GPUs, combined with the ease of programming through CUDA, made them the go-to choice for many companies.
However, with Nvidia’s GPU prices escalating in response to its strong market position, many corporations have turned to Broadcom for custom AI chip solutions. One of Broadcom’s inaugural customers in this space was Alphabet, for whom it developed the Tensor Processing Unit (TPU) to enhance Google Cloud services. The TPU is specifically designed to optimize AI workloads within the TensorFlow framework, leading to improved performance and reduced operational costs through lower power consumption.
Broadcom is actively expanding its clientele for custom AI chips. Notably, Meta Platforms and OpenAI are reported to be collaborating with Broadcom for their AI chip initiatives. Broadcom anticipates that the total addressable market for these three partners could range between $60 billion and $90 billion by its fiscal year 2027 (ending in October 2027). Currently, Broadcom’s annual AI revenue rate is just over $16 billion, highlighting substantial room for growth.
Additionally, Broadcom is rumored to have more custom AI chip clients lined up, including Apple and ByteDance, the parent company of TikTok. The design-to-production timeline for Alphabet’s chips took roughly 15 months, suggesting a similar duration for other projects, which will eventually contribute to revenue. Two more potential custom AI chip customers have also been hinted at by Broadcom.
Image source: Getty Images.
Evaluating Stock Options: Nvidia vs. Broadcom
From a valuation standpoint, Nvidia and Broadcom trade at similar forward price-to-earnings (P/E) multiples—21.5 times for Nvidia and 23 times for Broadcom. Although Nvidia has promising prospects ahead, Broadcom may boast stronger growth potential moving forward.
This potential stems in part from the law of large numbers, as Nvidia has already experienced a revenue increase exceeding 380% over the past two years. Meanwhile, Broadcom is making significant strides in the AI chip sector. Given the extensive time and investment required for developing custom chips, Broadcom’s clients will likely deploy these solutions in large-scale projects.
Both companies are likely to capture market share in the AI chip industry, with robust growth expected for each. However, I lean slightly toward Broadcom’s stock considering the significant opportunities ahead. In practice, investors might consider holding shares of both companies for the long term.
Is Now the Time to Invest $1,000 in Nvidia?
Before buying stock in Nvidia, it’s important to keep the following in mind:
The Motley Fool Stock Advisor analyst team has identified what they believe are the 10 best stocks to buy currently, and Nvidia is not included on that list. The selected stocks are projected to deliver significant returns in the coming years.
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Suzanne Frey, an executive at Alphabet, serves on The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokesperson for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is also on The Motley Fool’s board. Geoffrey Seiler has positions in Alphabet. The Motley Fool holds positions in and recommends Alphabet, Apple, Meta Platforms, and Nvidia, and recommends Broadcom. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
