Investors Should Buy Broadcom's Stock Before Everything Changes

Broadcom (NASDAQ: AVGO) is one of the greatest stocks that not everyone has discovered yet. Although it's a $2 trillion giant, investors seem to often forget about it. However, I think that will change over the next few years.

Broadcom is a rising competitor in the artificial intelligence (AI) chips space, and management has already told investors that major changes are coming, and these will easily push Broadcom to new heights. I think investors need to take notice and invest accordingly, as Broadcom is about to change the AI computing realm.

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Broadcom's custom AI chips are taking the world by storm

Most of the investing attention surrounding AI computing has been on Nvidia (NASDAQ: NVDA), which makes broad-purpose GPUs. This shouldn't come as a surprise, as it holds the largest market share, by far, of the computing chip designers. However, Broadcom is coming for Nvidia.

Broadcom isn't offering broad-purpose GPUs. Instead, it's collaborating directly with AI hyperscalers to create custom AI chips that are tailored to their workloads. This often provides the best cost performance for training and inference, and only comes at the cost of flexibility.

Most AI companies know what their workloads will look like by now, so designing a chip with Broadcom to optimize performance is a no-brainer. Furthermore, they will always maintain some level of access to Nvidia chips to handle other workloads that don't suit their standard variety.

Said CEO Hock Tan in March: "...our custom accelerator business grew 140% year-on-year in Q1. This momentum continues in Q2. The ramp of custom AI accelerators across all our five customers is progressing very well."

The best example of a Broadcom-designed chip is Google's Tensor Processing Unit (TPU). A lot more companies are starting to deploy TPUs in their AI stacks, and that's due to their impressive performance. Over the next few years, there will be an increase in TPU usage alongside other custom AI chips being launched.

All of this is leading to substantial growth for Broadcom. Currently, custom AI chips are accounted for in the AI semiconductor division, which generated $8.4 billion in revenue in its latest quarter, up 106% year over year. There are other products in that segment, so custom AI chips by themselves aren't delivering more than $8.4 billion in quarterly revenue.

However, by the end of 2027, Tan believes custom AI chips will deliver $100 billion or more in revenue. That's major growth in a short time frame, and showcases the orders that Broadcom is receiving to produce more custom AI chips.

AVGO Revenue (TTM) data by YCharts

I think this will dramatically change how the market views Broadcom over the next few years. Although it's already a $2 trillion company, it could have even greater upside ahead if custom AI chips become more popular than Nvidia's broad-purpose GPUs, as I think they will.

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