Nvidia Just Piled $2 Billion Into This Chip Stock, and It Can Still Climb Higher From Here

Nvidia (NASDAQ: NVDA) is by far the biggest chipmaker in the world, taking in hundreds of billions of dollars from big tech companies that are outfitting AI data centers with its high-end AI processors. Instead of letting that all of that cash sit on its balance sheet, Nvidia has been strategically investing some of it in other companies. It notably took a $5 billion stake in Intel last fall, and it recently bought a $2 billion stake in another chipmaker.

Not only does Nvidia's investment indicate the company is making notable moves in the semiconductor industry, but it also creates a durable partnership that could give it a leg up. And despite the market's positive reaction to the news, it's not too late for retail investors to follow Nvidia's lead and buy the stock.

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Nvidia's investing in the competition

Nvidia's latest investment is Marvell Technologies (NASDAQ: MRVL). The company has received a lot of attention over the last few years for its custom AI accelerator (XPU) business. Marvell designs Microsoft's (NASDAQ: MSFT) custom Maia chips and previously designed Amazon's (NASDAQ: AMZN) Trainium and Inferentia chips.

Amazon CEO Andy Jassy thinks there's significant potential for XPUs. He likens them to Amazon's custom CPU, Graviton. Amazon introduced the Graviton in 2018, noting that it delivered 40% better price performance than x86 processors like Intel's. Today, Jassy says 98% of the top 1,000 customers of Amazon's Elastic Compute Cloud use servers that feature Graviton CPUs.

Microsoft Chief Technology Officer Kevin Scott has indicated that his goal is for Microsoft to transition over time to mostly using its own custom silicon for AI training and inference. The company is reportedly gearing up to spend heavily on its next-generation Maia 300 chips.

The investment from Nvidia indicates the chip leader's admission that XPUs could displace GPUs from some uses over time, and Nvidia wants to ensure it maintains a key role in data centers. Not only would Nvidia benefit from owning a stake in one of the biggest XPU designers, but it's also now partnering with Marvell to ensure interoperability between its XPUs and Nvidia's GPUs.

Marvell will produce custom XPUs compatible with Nvidia's NVLink networking, meaning its CPUs, switches, and other server equipment will all work together for customers looking to use more XPUs rather than GPUs. It also means customers can swap GPUs for XPUs and vice versa without having to switch the rest of the technology stack.

The bigger business for Marvell

While its custom chips are getting all the attention from investors, Marvell also remains a market leader in optical interconnect. Moving data from one server to another requires converting electrical signals into light (which allows for much faster transmission of the data) and then converting them back on the other end. Marvell makes the chips and systems that do that better than any other player in the industry. As data centers continue to expand, the need for faster networking and interconnect will become even more important.

Management said it expects interconnect-related revenue to climb 50% this year, significantly faster than its custom chip business. Longer term, it expects continued strong growth for interconnect, outpacing hyperscalers' capital expenditures, while the custom business will see a massive bump from Microsoft's Maia 300 ramp.

Importantly, both segments play well together. The Nvidia agreement ensures that Marvell's interconnect chips will work with its GPUs, but Marvell's interconnect strength also opens the door for it to take accelerator slots with its own XPUs.

Combined, the two should enable Marvell to grow earnings quickly over the next few years. Analysts currently expect Marvell's earnings to climb 23% this year, but to accelerate to 41% growth in fiscal 2028 and 36% the year after that.

With those expectations in mind, its forward P/E ratio of 34 still makes Marvell look like an excellent pick for investors looking to buy an AI chip stock that can provide significant diversification from Nvidia while capitalizing on the massive trends in the industry. It's no wonder Nvidia bought shares and secured its position.

Adam Levy has positions in Amazon and Microsoft. The Motley Fool has positions in and recommends Amazon, Intel, Marvell Technology, Microsoft, and Nvidia. The Motley Fool has a disclosure policy.