Better Artificial Intelligence Stock: Broadcom vs. Nvidia

Among the companies benefiting from artificial intelligence (AI) entering the mainstream are semiconductor giants Broadcom (NASDAQ: AVGO) and Nvidia (NASDAQ: NVDA). The arrival of AI supercharged sales for both businesses as customers sought the necessary hardware and software to implement AI into their organizations.

As a result, Broadcom stock skyrocketed to a 52-week high of $186.42 in October, a dramatic change from the $90.31 low it was at last December. Nvidia also saw its stock soar over the past year, from last December's 52-week low of $45.01 to a high of $152.89 as of Nov. 21.

Both remain in a position to continue benefiting from AI-related demand, which shows no signs of abating. Industry forecasts estimate the AI market will experience a multi-year expansion from around $184 billion this year to over $826 billion by 2030.

With Broadcom and Nvidia both doing well, is one a better investment to capitalize on the growing AI market? Here's a comparison of each to help you arrive at an answer.

Broadcom's AI approach

Broadcom's ability to capture AI demand lies in its expansive semiconductor business. It offers an array of products for tech industries such as computer networking, storage, and broadband.

So it's understandable that the emergence of AI has powered sales growth for the company. In its fiscal third quarter, ended Aug. 4, Broadcom delivered $13.1 billion in revenue, a 47% year-over-year increase.

Its networking hardware, in particular, benefited from AI demand, as sales in this area rose 43% year over year to $4 billion. But softness in non-AI related sales meant the division's overall Q3 revenue growth was just 5% year over year to $7.3 billion.

The other major area of Broadcom's business, software to manage IT infrastructure, grew a whopping 200% year over year to $5.8 billion thanks to the company's acquisition of VMware last November. The VMware Cloud Foundation (VCF) platform enables Broadcom's customers to establish a private AI.

Private AI protects customer data from use by AI other than those designated by the customers. Broadcom tackling the nascent private AI market is proving to be a masterful strategy. Customer demand for the technology led to VCF comprising over 80% of VMware's Q3 product bookings.

Nvidia's AI success

Nvidia has been one of the biggest beneficiaries of the fervor over AI because of its focus on accelerated computing. This type of computer architecture processes data-intensive tasks separately from the work handled by a CPU, making it ideal for complex tech such as AI.

Nvidia championed accelerated computing with the creation of its graphics processing unit (GPU) in 1999. The company is now recognized as the world leader in GPUs with some estimates placing its market share at 80%.

Results for its fiscal third quarter, ended Oct. 27, proved it remains a leader in the accelerated computing space. It achieved record Q3 revenue of $35.1 billion, up 94% from the prior year.

The company expects this sales growth to continue into Q4 with revenue estimated to reach around $37.5 billion. That's a 70% increase over the previous year's $22.1 billion.

Nvidia is likely to continue seeing sales supercharged by AI demand. According to CEO Jensen Huang, "AI is transforming every industry, company and country." To his point, Denmark and Japan used Nvidia products to build AI supercomputers.

Choosing between Broadcom and Nvidia stock

With Broadcom and Nvidia both seeing success in their AI-related offerings, it's not easy to decide which wins out as the better AI investment. One consideration is to look at the diluted earnings per share (EPS) for each company.

Data by YCharts.

As the chart shows, once AI demand exploded in 2023, Nvidia's EPS rocketed up while Broadcom's declined. Over its last three fiscal quarters, Broadcom's net income dropped to $1.6 billion from $10.6 billion in the previous year as it dealt with higher expenses related to its VMware acquisition.

Another factor to weigh is the price-to-earnings ratio (P/E ratio) for each company. This metric tells you how much investors are willing to pay for every dollar of earnings, which helps you to assess the relative value of a stock.

Data by YCharts.

Broadcom's P/E ratio has become elevated compared to Nvidia's at the time of this writing. This suggests that Nvidia's stock is the better value right now. Between Broadcom and Nvidia, the latter's lower P/E multiple and higher EPS, combined with its leadership position in accelerated computing, means Nvidia is the superior AI stock to buy and hold for the long term.

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Robert Izquierdo has positions in Nvidia. The Motley Fool has positions in and recommends Nvidia. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.