Could Broadcom Become the Next Nvidia?

Nvidia has been the star of the artificial intelligence (AI) show so far, as this tech giant sells the fastest and most powerful AI chips. Customers put these graphics processing units (GPUs) to work in important ways, such as powering the training and inference of large language models. This has resulted in explosive earnings growth and a stock price that's climbed 1,300% over five years.

But Nvidia isn't the only high-potential AI company around. And investors looking for additional opportunities in the space may turn to another company that's earlier in its AI story and showing tremendous progress. I'm talking about networking giant, Broadcom (NASDAQ: AVGO). The company has built an empire in this field -- in fact, more than 99% of internet traffic touches Broadcom technology.

The AI boom has supercharged demand for Broadcom's networking and compute abilities, and the company emerged as a significant player when it launched its XPU technology in 2024. With all of this in mind, could Broadcom become the next Nvidia? Let's find out.

Image source: Getty Images.

Broadcom's custom chips

So, first, it's important to keep in mind that while Nvidia and Broadcom both sell networking equipment and chips, their selection isn't exactly the same. In fact, they aren't truly direct competitors. Nvidia's GPUs are general-use, providing unequaled power for a variety of projects. Broadcom's XPUs are custom chips, designed to suit a specific purpose. This means that Broadcom's growth doesn't necessarily hurt Nvidia's market position, and the great news for Broadcom here is that the company doesn't have to "beat Nvidia" to succeed.

A look at Broadcom's latest earnings report offers us some clues about what's to come. The company has seen mind-boggling growth in recent times. It works with six major customers to develop XPUs to suit their needs, and in the quarterly report, it said these partnerships are "deep, strategic, and multiyear."

Last fall, Broadcom said a customer had placed a $10 billion order -- and later in the year, the company announced that this mystery customer was Anthropic. In fact, Anthropic then placed an additional $11 billion order. The company also recently signed a deal with new customer OpenAI and has deals with Meta Platforms and Alphabet.

AI revenue soars

In the recent quarter, AI revenue climbed more than 100% to $8.4 billion, supported by high demand for AI accelerators and networking, and the company expects that figure to reach beyond $10 billion in the next reporting period. Networking revenue represented about a third of total AI revenue, and Broadcom predicts this will grow to 40% in the current quarter. Demand is high for the Tomahawk 6 switch, and the next-generation product, to debut next year, will double performance.

And chips could become an enormous revenue driver over the next few years. Broadcom predicts that AI revenue from chips alone may top more than $100 billion in 2027, and the company has the supply chain to support this massive growth.

Now, let's return to our question: Could Broadcom become the next Nvidia? Today, Nvidia's annual revenue has reached beyond $200 billion, thanks to its leadership in chips and its portfolio that encompasses a variety of AI products.

A significant chip and networking player

Broadcom, too, has expanded its reach in AI and is on track to become a significant player in the chip and networking space. AI revenue also may be set to soar, if the company's predictions are right. And messages from other chip designers and cloud service providers have been positive, emphasizing the strength of demand quarter after quarter.

Meanwhile, Broadcom stock trades at 29x forward earnings estimates, down from more than 50x a few months ago, and the company's market value is about $1.5 trillion, well below the levels of $3 trillion and $4 trillion of the biggest tech players. All of this offers Broadcom stock room to run in the quarters and years to come -- and today's reasonable valuation may attract investors to this promising AI stock.

This means that Broadcom surely won't replace Nvidia, but for investors, this company may offer earnings and stock performance similar to those of the AI giant.

Adria Cimino has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Meta Platforms, and Nvidia. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.