1 Artificial Intelligence (AI) Stock That I Just Bought on the Dip

The artificial intelligence (AI) investment wave has taken a downturn over the past few weeks. The stock market has sold off across the board, and AI stocks have taken a bit more of a beating.

This opened up a few investment opportunities and allowed me to add another stock to my portfolio: Broadcom (NASDAQ: AVGO). It's a very wide business and has its fingers in many industries, but there's one that I'm most excited about: custom AI accelerators. This business unit has the potential to grow massively over the next few years, and it could be exactly what the stock needs to crush the market.

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Broadcom's XPUs are going to become more popular over the coming years

Right now, the AI computing market is dominated by graphics processing units (GPUs) mainly made by Nvidia. GPUs are fantastic at processing complex calculations due to their ability to compute in parallel. They're also extremely flexible at performing multiple tasks and can be used to mine cryptocurrency, process engineering simulations, discover healthcare drugs, or train AI models.

However, if you consider what the AI hyperscalers are doing, it's clear that they don't need all of the incredible capabilities that Nvidia packs into a GPU. Instead, if they could do one type of workload very well (like train AI models or handle AI model inference), that would be all they need.

That's where Broadcom's custom AI accelerators (which it calls XPUs) step in. The chips can be designed to handle a specific type of workload very effectively and far outperform Nvidia's GPUs at the cost of losing flexibility. Many AI hyperscalers are willing to make this trade-off, which is why Broadcom projects huge growth in this sector.

By 2027, management expects that the market size for its XPUs will reach $60 billion to $90 billion. Considering that this division generated $12.2 billion in 2024, that's a huge uptick.

And that market opportunity is from only three clients. Broadcom also has two clients that are expected to release their first XPU design later this year and two more that have recently asked it to help develop their own XPUs. This will massively expand the original range that management quoted, which is extremely bullish for the stock.

While it's unlikely that Broadcom will be able to capture all of that market opportunity, if it can capture a decent chunk by 2027, it will significantly boost the stock.

Broadcom's stock is a bit expensive, but I think it's worth the price

Over the past 12 months, the company generated around $54 billion in revenue. So, expecting revenue to double between now and 2027 isn't an outlandish assumption. That's only three years away, and most companies growing only at market pace double once every seven years.

As a result, I would expect Broadcom's stock to trade at a premium to the market.

AVGO PE Ratio (Forward) data by YCharts; PE = price to earnings.

This is exactly the case, as the S&P 500 (SNPINDEX: ^GSPC) trades for 21.1 times forward earnings. However, even with that premium, the company's expected growth should allow it to blow past the market in total return, which is why I bought the stock.

There is one unknown: tariffs. President Donald Trump announced his list of tariffs, and Taiwan was one of the hardest-hit countries, with a 32% rate. This is a big deal because many of the chips that go into Broadcom's XPUs come from Taiwan Semiconductor Manufacturing. But there is a specific carve-out for semiconductors that exempts TSMC from tariffs for now.

It will be some time before investors know the true effect. Nonetheless, I think the tailwinds powering the AI race will likely prevail and should still bolster Broadcom's XPU business, which is why I took a position in the stock. With the stock getting whacked alongside the broader market once the tariffs were unveiled, I may consider adding even more to my position.

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Keithen Drury has positions in Broadcom, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool has positions in and recommends Nvidia and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.