1 Top Artificial Intelligence (AI) Chip Stock to Buy Hand Over Fist Before It Jumps

2025 has been a difficult year for artificial intelligence (AI) semiconductor stocks so far, as the sector has been hit hard by a spate of negative news that has led investors to overlook the strong results that companies in this sector have been delivering.

Broadcom (NASDAQ: AVGO), however, managed to buck that trend by handsomely crushing Wall Street's expectations and delivering solid guidance when it released its fiscal 2025 first-quarter results (for the quarter ended Feb. 2) on March 6. Shares of the chip designer jumped more than 8% the following day.was well-placed to beat consensus expectations

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What's worth noting is that Broadcom stock is still in the red this year, down 20% as of this writing. But the good part is that it can still be bought at an attractive valuation. Let's take a closer look at the reasons why investors are upbeat about Broadcom's latest results and check why this semiconductor stock is worth buying right now.

Broadcom's AI-driven momentum is here to stay

Broadcom is known for designing application-specific integrated circuits (ASICs), which are programmed to perform specific tasks instead of general-purpose computing. The demand for these customizable chips has increased thanks to growing demand for AI training and inference, as they carry a cost and performance advantage over graphics processing units (GPUs) sold by the likes of Nvidia.

This explains why major cloud service providers have been turning to Broadcom to develop custom AI processors to lower their AI infrastructure costs. The robust demand for Broadcom's AI chips and networking components was the biggest reason behind the 25% year-over-year jump in its revenue and the 45% spike in its earnings per share.

The company sold $4.1 billion worth of AI chips and networking solutions last quarter, an increase of 77% from the year-ago period. Broadcom management points out that its AI revenue exceeded its expectations by $300 million last quarter on account of stronger-than-expected demand from its cloud customers.

Broadcom management added on the latest earnings conference call that its "hyperscaler partners continue to invest aggressively in their next-generation frontier models, which do require high-performance accelerators, as well as AI data centers with larger clusters." As a result, the company is ramping up its research and development (R&D) efforts to churn out more capable custom AI processors to help its customers tackle bigger AI workloads.

Broadcom points out that it currently has three hyperscale cloud customers using its AI chips. The company has aligned its R&D efforts with these three customers through fiscal 2027. That's not surprising, as Broadcom believes that they can open up a serviceable revenue opportunity worth $60 billion to $90 billion over the next three years.

What's worth noting is that Broadcom was already "deeply engaged with two other hyperscalers in enabling them to create their own customized AI accelerator" in addition to its three existing customers. Even better, it has brought another two cloud hyperscale customers on board since December. The company has specified that the massive revenue opportunity it sees over the next three years excludes the potential revenue that it could get from its four new customers.

So, Broadcom's AI-powered growth is just getting started. The company is now getting just over 27% of its revenue from AI, but that figure is likely to move higher thanks to the huge addressable market that Broadcom sees in this segment. Not surprisingly, analysts have bumped their revenue growth expectations.

AVGO Revenue Estimates for Current Fiscal Year data by YCharts

Stronger earnings growth points toward impressive stock price upside

The good news for Broadcom investors is that the growing mix of AI-related revenue is positively impacting margins. More specifically, Broadcom's gross margin from its semiconductor business increased by 70 basis points year over year last quarter, allowing the company to exceed its overall gross margin expectations.

Given that Broadcom's AI business has immense room for growth, it won't be surprising to see the company's margin profile getting better. This explains why analysts are expecting Broadcom's earnings growth to accelerate.

AVGO EPS Estimates for Current Fiscal Year data by YCharts

With the stock trading at 30 times forward earnings right now, it isn't too late for investors to buy it. The tech-laden Nasdaq-100 index has an identical average earnings multiple. Assuming Broadcom manages to generate $9.12 per share in earnings after three years (as per the chart of estimates above) and still trades at a P/E multiple of 30, its stock price could hit $274.

That would be a 48% increase from the stock price as I write this. However, this AI stock could deliver much stronger gains than that, as the market could put a premium on its valuation on account of its improving growth profile and the lucrative AI-focused opportunity it is sitting on. That's why savvy investors would do well to buy Broadcom stock before it soars even higher.

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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.