Forget Nvidia: This Stock-Split AI Stock Could Be a Better Buy

Move aside Nvidia — there are other ways to bet on the artificial intelligence hardware opportunity.

Artificial intelligence (AI) stocks have exploded in popularity following the release of OpenAI’s ChatGPT in late 2022. Their consistently rising prices have led industry leaders like Nvidia to enact stock splits, looking to make their shares more liquid and available to regular investors.

But Nvidia isn’t the only way to bet on this exciting new opportunity. Let’s explore why Broadcom (AVGO 4.33%) is another soaring AI stock split that belongs on your investment radar.

Is Broadcom the next Nvidia?

Formed by the 2015 merger between Broadcom Corporation and Avago Technologies, Broadcom is a diversified semiconductor company that designs and manufactures an array of information technology hardware.

Unlike Nvidia, Broadcom isn’t a big player in the market for high-end, general-purpose graphics processing units (GPUs) used to train and run generative AI algorithms. Instead, it gains exposure to the industry through custom chips tailored to each client’s specific use case.

For data centers, opting for a Broadcom-designed custom chip probably has more up-front costs and commitments than buying off-the-shelf solutions like Nvidia’s H100. But the trade-off comes with cost and power advantages, which can pay off over the long term.

Broadcom boasts big-name clients like Alphabet (which contracts with Broadcom to design its Google TPU chips) and Chinese social media giant Bytedance, which reportedly aims to use Broadcom services to help ensure a supply of powerful processors amid rising tensions with the U.S. government. Opting for Broadcom’s custom chips can help the Chinese company fit within tightening export controls that effectively block many of Nvidia’s most advanced GPUs.

Non-AI-related growth drivers

It’s never a good idea to put all your eggs in one basket — especially if that basket is a hyped-up tech megatrend. While AI technology might transform the global economy, we don’t know when that will happen, or if the current demand for AI chips is sustainable. Previous hype cycles like the internet ended badly for companies that overexposed themselves too early. 

Person investing in technology on computer.

Image source: Getty Images.

The good news is that Broadcom’s business is diversified. The company provides semiconductor services for industries ranging from smartphones to enterprise networking. And while these are mainly mature businesses, they help stabilize Broadcom’s operations.

But the company also has an exciting non-AI-related growth driver, VMware. Completed in 2023, the $69 billion deal was one of the biggest in tech history. It gave Broadcom more exposure to the infrastructure software business and helped send overall company revenue up 43% year over year to $12.49 billion in the second quarter.

Is Broadcom stock a buy?

Despite shares jumping almost 470% over the last five years, many smaller investors are finally taking notice of Broadcom after management announced a 10-for-1 stock split that could bring its quadruple-digit stock price back down to earth when it goes live on July 15. Remember that this move doesn’t change the company’s market cap (the value of all shares outstanding) or its valuation relative to earnings.

The good news is that with a forward price-to-earnings (P/E) of just 28, Broadcom’s valuation is in line with the Nasdaq average of 31 and cheap compared to AI-related alternatives like Nvidia or Advanced Micro Devices, which boast forward P/Es of 36 and 54, respectively. This means the company remains a safer way to bet on the long-term AI opportunity.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, and Nvidia. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.

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