Nvidia’s volatility continues to have ripple effects across the tech industry and the market as a whole. In August, Nvidia’s stock price fell to a low of $90.69 per share and rose to a high of $131.26 per share, representing some pretty big swings in a short period of time.
Nvidia reported earnings on Aug. 28, reporting strong growth and outlook that beat expectations, but its stock price fell. Nvidia stands out as a solid buy in the chip space for investors who can stomach volatility.
But another stock worth considering right now is infrastructure software and solutions company Broadcom. (NASDAQ: AVGO)Here’s why Broadcom is a unique opportunity in the semiconductor industry, attractive to growth, earnings, and value investors alike.
AI Investment Opportunities
There are several ways to invest in artificial intelligence (AI).
It wasn’t that long ago that graphics was NVIDIA’s largest segment, but now computing and networking (focused on data centers) account for the majority of revenue and operating profits. NVIDIA makes graphics processing units (GPUs) that are the foundation of a variety of AI computing platforms capable of processing large amounts of complex data and workloads.
Then there are companies like Meta Platforms, a major Nvidia customer that uses AI across its business to help customers improve the quality of content creation, speed up content, optimize search algorithms to keep users engaged, and much more. Similarly, Microsoft’s AI solutions, like Copilot for Microsoft 365, GitHub Copilot, and Azure AI for cloud infrastructure, are software upgrades that increase efficiency and save time.
Broadcom takes a very different approach to AI. The company manufactures a range of hardware and software solutions that serve customers in areas including cloud infrastructure, data center, networking, broadband, wireless, storage, industrial applications and enterprise software. Its products play a critical role in global connectivity.
The company has a diversified, proven business with great potential for growth with AI. Broadcom’s application-specific integrated circuits (ASICs) are high-performance, custom silicon chips. While ASICs do not have the broad range of capabilities of GPUs, they are highly effective solutions for specific tasks. Broadcom has been manufacturing ASIC solutions for over 30 years.
Today, the company manufactures custom silicon for customers who need to handle complex AI workloads. Broadcom leverages its own intellectual property portfolio to create these custom ASIC AI accelerators. In this sense, they’re an extension of the company’s core competencies rather than an entirely new product.
The story continues
In addition to AI accelerators, Broadcom is also seeing rapid growth in Ethernet switches supporting AI workloads. Broadcom has been in Ethernet networking for over 25 years and has market share in cloud-scale networking, routing, and AI. Ethernet adapters are needed to meet the demand for faster data transfer speeds in high-load network environments. The large amounts of data needed to train large language models require larger server clusters and more connectivity.
In other words, Broadcom’s products complement GPUs and improve their performance, allowing customers to build larger GPU clusters.
Broadcom is delivering results and increasing its dividend
Broadcom’s results and guidance show AI is helping accelerate growth. In the June quarter, Broadcom said it expects revenue from AI chip sales to reach more than $11 billion this year, or more than 20% of total revenue. Its November 2023 acquisition of VMware for $86.3 billion has helped drive 43% year-over-year revenue growth in the second quarter of 2024. VMware is a cloud computing and enterprise software company.
Excluding VMware’s contribution, Broadcom’s revenue growth was somewhat disappointing, primarily due to cyclical weakness in semiconductor sales. Broadcom is transitioning all of its VMware products to a subscription licensing model, which should provide Broadcom with a stable revenue stream that can help offset some of the cyclical weakness in its hardware business.
Another unique feature that sets Broadcom apart from many other chip stocks is its dividend. Over the past five years, it has nearly doubled its payout, and it now yields 1.4%. That may not seem like a high yield, but it currently beats the S&P 500’s 1.2% yield.
Broadcom is a balanced buy
Broadcom has many ways to monetize AI, but that’s not a bet that will determine its success or failure on the topic, making it a lower-risk bet than pure AI growth stocks whose revenues depend heavily on capital spending by big tech customers.
Broadcom’s stock also trades reasonably well: It trades for 32.4 times forward earnings, roughly the same as software companies like Microsoft and Adobe, and cheaper than Nvidia’s 37.3 and Advanced Micro Devices’ 41.7.
Add it all up and Broadcom has a lot to offer as a chip stock worth buying in September and holding for at least three to five years.
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Randi Zuckerberg, former director of market development and spokeswoman for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Daniel Folber has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Adobe, Advanced Micro Devices, Meta Platforms, Microsoft, and NVIDIA. The Motley Fool recommends Broadcom and recommends long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
If I could buy just one non-Nvidia chip stock in September, this would be my top choice. This was originally published by The Motley Fool.
