Forget AMD: This AI Hardware Stock Is the Smarter Bet Right Now

Advanced Micro Devices (NASDAQ: AMD) has had a great year, rising more than 120% so far. However, it has gotten a bit hot. AMD's valuation has soared, and it doesn't quite have the same catalysts coming up in 2027 as another top AI hardware stock: Broadcom (NASDAQ: AVGO).

Broadcom is a much better deal in my opinion, and will lead it to new heights over the next year and vastly outperform AMD over the coming year.

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Both are exposed to AI

AMD has clear exposure to the AI build-out via its data center division, which supplies GPUs and other computing components to those in the space. This part of AMD's business is doing great and saw 107% year-over-year growth to $6.7 billion in the second quarter. However, it has nothing on Broadcom.

Broadcom does a lot of different things as a company, but what investors are most focused on is its custom AI chips. While AMD makes GPUs, which are great for all sorts of workload types, some of that capability gets wasted when the device is only used to process one type of workload during its service life.

To cut costs, AI hyperscalers are starting to partner with companies that have computing unit design expertise, and Broadcom is one of them. Broadcom and its clients collaborate and design a computing chip tailored around the workload it will see, which can result in higher performance at a lower cost. With AI hyperscalers looking to maximize computing power for every dollar they spend, this is a no-brainer decision.

While there will always be the need for general-purpose GPUs, custom AI chips are starting to become more popular, and I suspect this trend will persist throughout the rest of the AI buildout. This trend is already becoming apparent in Broadcom's results, and it could easily propel its stock to outperform AMD over the next few years.

During its fiscal 2027's third quarter (ended August 2), AI semiconductor revenue totaled $16.7 billion, growing at a 221% year over year pace. That's an incredible growth rate, and it makes Broadcom's AI division nearly three times as large as AMD's and growing at a faster pace. But it's not done there either.

Broadcom has long projected next year's AI semiconductor revenue to total $100 billion, but it increased its guidance to $115 billion during this quarter. In 2028, they expect to double again to $230 billion. That's an incredible outlook, and that business will make AMD's look like a drop of water in a bucket.

AMD doesn't have any growth projections like that, and I think it underscores that Broadcom is a far greater investment than AMD, but that's not the only reason why it's a better buy.

Broadcom is far cheaper than AMD

After this year's run-up, AMD's stock price has gotten expensive. Broadcom's valuation isn't the cheapest either, but that doesn't factor in the major growth it expects during fiscal 2027. As a result, I think valuing the stock based on next year's earnings projections makes the most sense, and from this perspective, Broadcom is far cheaper.

AMD PE Ratio (Forward 1y) data by YCharts

Broadcom is clearly doing better as a business than AMD is, yet it's valued at nearly half the price. This mismatch doesn't make a lot of sense, and it either informs investors that AMD is overvalued or Broadcom is undervalued. I think both are true, and that only leaves one logical course of action: Sell AMD stock to buy Broadcom shares. This move makes a ton of sense, and I think it will pay off big time for investors over the next few years.

Keithen Drury has positions in Broadcom. The Motley Fool has positions in and recommends Advanced Micro Devices and Broadcom. The Motley Fool has a disclosure policy.