Stocks tied to artificial intelligence (AI) infrastructure remain one of the hottest areas of the market, even after three years of outsized gains. With the five largest hyperscalers alone set to spend a combined $700 billion-plus this year on AI data centers, this already huge (yet still growing) market shows little sign of slowing.
Two of the companies best positioned to benefit from this surge are Nvidia(NASDAQ: NVDA) and Broadcom(NASDAQ: AVGO). However, the question is which stock looks like the better buy.
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When it comes to AI infrastructure, Nvidia is the company to beat. Its graphics processing units (GPUs) remain the muscle behind the AI build-out. The company has taken a dominant lead in the space in large part thanks to the ecosystem it has built around its chips. This starts with its CUDA software platform.
Nvidia created CUDA nearly two decades ago as a way for developers to program its GPUs for uses outside their original purpose, which was to speed up graphics rendering in video games. While other markets took time to develop, the company smartly gave away the free platform to universities and research labs that were doing early work on AI. This led to developers being trained on its software platform and most foundational code being written on CUDA and optimized for Nvidia’s GPUs. That’s a major reason why the company has such a wide moat, especially when it comes to AI model training.
On top of that, Nvidia has also crafted an edge with its networking portfolio. The most important component of this is its proprietary NVLink interconnect system, which essentially helps Nvidia’s chip clusters act as one big unit. Nvidia’s networking portfolio also now allows the company to deliver end-to-end AI server solutions.
From a valuation standpoint, the stock trades at a forward price-to-earnings (P/E) ratio of below 22 times based on current-year analyst estimates. That’s cheap for a stock that just reported 73% revenue growth and continues to have strong prospects ahead.
Broadcom is benefiting from the AI build-out in two main ways. First, it is one of the world’s leading data center networking companies, where its components — such as Ethernet switches, digital signal processors (DSPs), and network interface cards (NICs) — all help data center operators manage data flow and distribute AI workloads across servers. Its Tomahawk solution is considered the gold standard for Ethernet solutions and is a leading competitor of Nvidia’s proprietary InfiniBand solution. As AI chip clusters keep increasing in size and complexity, networking becomes even more important and is set to grow at a faster pace than compute.
At the same time, Broadcom is also a leader in ASIC (application-specific integrated circuit) technology. ASICs are hardwired custom chips that are designed for specific purposes. As such, they tend to perform these tasks very well, while also being more energy efficient. As the market starts to shift toward inference, this becomes even more important, as it helps save costs. Meanwhile, Nvidia’s moat in inference isn’t nearly as wide as the one it has in training.
With its ASIC business, Broadcom gives customers the building blocks to help them create their own custom AI chips and turn their designs into physical chips that can be manufactured at scale. It helped Alphabet create its highly regarded Tensor Processing Units (TPUs), which Alphabet uses for all its internal workloads, and is now just branching out to sell them outside its cloud computing offering. Broadcom has already taken a large TPU order from Anthropic.
Meanwhile, other customers, including OpenAI, are working on developing their own custom AI ASICs with Broadcom. It recently projected that it would generate $100 billion in AI ASIC revenue alone in fiscal 2027. That’s a huge prediction, as it just generated a little less than $64 billion in total revenue this past fiscal year, with about $20 billion in AI revenue (including networking).
Nvidia is currently the cheaper stock, as Broadcom trades at about 30.5 times this year’s analyst earnings-per-share (EPS) estimates. However, I think right now Broadcom has the bigger growth opportunity. With tech investors loving growth above all else, I think Broadcom is poised to outperform Nvidia over the next few years. However, both are great stocks to own.
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Geoffrey Seiler has positions in Alphabet and Broadcom. The Motley Fool has positions in and recommends Alphabet and Nvidia. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
