Not AMD. Not Marvell. Here's Which Company Nvidia Needs to Be Worried About.

Nvidia holds the title for the largest market share in the artificial intelligence (AI) computing unit market. Its GPUs have become synonymous with AI computing power, but it's not without competition.

One of the more obvious picks is Advanced Micro Devices, as it also makes GPUs. However, AMD's data center division is far smaller than Nvidia's and also grew at a slower rate during its most recent quarters.

However, GPUs aren't the only way AI computing is done. While GPUs are incredibly flexible and can do a lot of tasks, they aren't optimized for any one workload. There are many tasks that need to be done on a repetitive basis in the AI world, and a specialized computing unit can thrive in these tasks.

This is where I see the biggest threat to Nvidia's business, and there are two key players in this industry.

Image source: Getty Images.

Custom AI chips are expected to become more popular in the future

The two primary custom AI chip firms are Marvell and Broadcom (NASDAQ: AVGO). Marvell's primary clients are Microsoft and Amazon, while Broadcom has partnered with Alphabet, Meta Platforms, Anthropic, and OpenAI. Marvell and Broadcom are very similar to AMD and Nvidia. While Marvell has the business and is competing, it doesn't have the size. Marvell's AI data center revenue totaled $2.1 billion in Q2.

Broadcom's AI semiconductor revenue reached $16.7 billion. Broadcom is the company to beat in this industry, and I think it's one that Nvidia actually needs to worry about.

The crown jewel of Broadcom's custom AI chip empire is Google's Tensor Processing Unit (TPU), a device that Broadcom and Alphabet have collaborated on for a long time. These units have gone through several generations and are even starting to be sold on the market by Alphabet because there's such high demand for them. Broadcom's other clients will look to recreate these units optimized for their own workloads, and Broadcom will benefit significantly from growth in this area.

This year, they estimate their AI segment revenue will be around $58 billion. However, that figure is expected to reach $115 billion in 2027 and $230 billion in 2028. For reference, Nvidia expects its 2027 revenue growth to be about 70% so that Broadcom will be growing at a slower pace. This points to Broadcom taking market share from Nvidia as the build-out grows. Still, it will never fully replace Nvidia, as GPUs are useful in many situations that custom AI chips aren't.

This leaves a major market open for both stocks, although Broadcom may be in a better position to capture more business. However, its stock isn't really pricing in any growth for 2027.

Broadcom's stock isn't expensive

Broadcom currently trades at 43 times trailing earnings, which isn't super cheap. However, it doesn't price in the massive growth it's expected to undergo next year.

AVGO PE Ratio data by YCharts

With the shares trading at 17 times next year's earnings estimates, it shows the market expects huge growth. If Broadcom rose to 35 times earnings by the end of next fiscal year, it would indicate that the stock has the potential to double.

That's a solid return in a short time frame, but remember, Broadcom also said it would double its revenue base again in 2028. That means there are multiple years of strong returns ahead for Broadcom. With it gaining new clients in the AI sector, there's a lot of opportunity for Broadcom to firmly establish itself alongside Nvidia as a major leader in the AI computing space. As a result, I think it's a smart buy now.

Keithen Drury has positions in Alphabet, Amazon, Broadcom, Meta Platforms, Microsoft, and Nvidia. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, Amazon, Broadcom, Marvell Technology, Meta Platforms, Microsoft, and Nvidia. The Motley Fool has a disclosure policy.