Broadcom is a pick-and-shovel way to invest in AI.
Nvidia‘s volatility continues to have rippling effects throughout the technology sector and the broader market. In August, Nvidia stock was as low as $90.69 a share and as high as $131.26 a share — representing a sizable range for such a short period of time.
Nvidia reported earnings on Aug. 28, delivering parabolic growth and higher-than-expected guidance. And yet, the stock sold off. Nvidia stands out as a solid buy in the chip space for investors that can endure volatility.
However, another stock worth considering now is infrastructure software and solutions company Broadcom (AVGO -10.36%). Here’s why Broadcom is a unique opportunity in the semiconductor industry and could appeal to growth, income, and value investors alike.
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AI investment opportunities
There are several different ways to invest in artificial intelligence (AI).
It wasn’t long ago that Nvidia’s largest segment was graphics. But now, compute and networking (led by data centers) make up the vast majority of revenue and operating income. Nvidia makes graphics processing units (GPUs) that underpin its various AI computing platforms that can process high amounts of complex data and workloads.
There are also companies like Meta Platforms, which is a major Nvidia customer. Meta leverages AI throughout its business to help customers improve the quality of their content creation, make content faster, optimize its search algorithm to keep users engaged, and more. Likewise, Microsoft‘s AI solutions, like Copilot for Microsoft 365, GitHub Copilot, and Azure AI for cloud infrastructure, are software upgrades that improve efficiency and save time.
Broadcom has a significantly different approach to AI than these companies. It makes a variety of hardware and software solutions that serve customers in cloud infrastructure, data centers, networking, broadband, wireless, storage, industrial applications, enterprise software, and more. Its products are instrumental in global connectivity.
The company has a diversified and proven business with tons of upside potential from AI. Broadcom’s application-specific integrated circuits (ASICs) are high-performance custom silicon chips. ASICs don’t have the range of functionality of GPUs, but they are highly effective solutions for specific tasks. Broadcom has been making ASIC solutions for more than three decades.
Today, it makes custom silicon for clients who need to handle complex AI workloads. Broadcom leverages its intellectual property portfolio to create these custom ASIC AI accelerators. In this vein, they are more an extension of the company’s core competencies rather than entirely new products.
In addition to AI accelerators, Broadcom has seen a boom in Ethernet switches to support AI workloads. Broadcom has been doing Ethernet networking for over 25 years, capturing market share in cloud-scale networking, routing, and AI. Ethernet adapters are needed to meet the demand for higher data transfer speeds in high-stress network environments. High data volumes needed to train large language models require bigger server clusters and more connectivity.
In sum, Broadcom’s products complement GPUs and improve their performance, which allows customers to build bigger GPU clusters.
Broadcom is delivering results and growing its dividend
Broadcom’s results and guidance show that AI is helping accelerate growth. In its June quarter, Broadcom said it expects to generate more than $11 billion in revenue this year from AI chip sales — representing over 20% of total revenue. Second-quarter 2024 revenue was up 43% year over year thanks to its November 2023 acquisition of VMware for $86.3 billion. VMware is a play on cloud computing and enterprise software.
Taking out the contribution from VMware, Broadcom’s sales growth has been somewhat disappointing — mainly due to cyclical weakness in semiconductor revenue. Broadcom is transitioning all VMware products to a subscription licensing model, which should provide Broadcom a steady income stream and help offset some of the cyclical downturns in its hardware business.
Another unique quality that separates Broadcom from many other chip stocks is its dividend, which has nearly doubled in the last five years and currently yields 1.4%. While the yield doesn’t sound high, it’s greater than the S&P 500 index’s 1.2% yield right now.
Broadcom is a balanced buy
Although Broadcom has plenty of ways to monetize AI, it’s not a make-or-break bet on the theme. This makes Broadcom a lower-risk bet than a pure-play AI growth stock whose earnings depend heavily on capital spending by big tech customers.
Broadcom stock also sports a reasonable valuation. Its forward price-to-earnings (P/E) ratio is 32.4 — which is around the same as that of software companies like Microsoft and Adobe and cheaper than Nvidia’s 37.3 or Advanced Micro Devices‘ 41.7.
Add it all up, and there’s a lot to like about Broadcom as a worthy chip stock to buy in September and hold for at least three to five years.
Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Adobe, Advanced Micro Devices, Meta Platforms, Microsoft, and Nvidia. The Motley Fool recommends Broadcom and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
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