Semiconductor company Nvidia (NASDAQ: NVDA) completed a 10-for-1 stock split in June , and fellow chipmaker Broadcom (NASDAQ: AVGO) has a 10-for-1 stock split planned for July . Savvy investors have gravitated toward both stocks. A company's share price tends to increase about twice as fast as the S&P 500 (SNPINDEX: ^GSPC) during the year following a stock split announcement.
Indeed, certain Wall Street analysts see substantial upside in Nvidia and Broadcom.
- Beth Kendig at the I/O Fund expects Nvidia to achieve a $10 trillion market capitalization by 2030. That forecast implies about 230% upside from its current market capitalization of $3 trillion.
- Joseph Moore at Morgan Stanley has outlined a bull-case price target that values Broadcom at $2,292 per share by June 2025. That will change to $229.20 per share after the stock split. Either way, that forecast implies 70% upside from its current price of $1,605 per share.
Here's what investors should know about Nvidia and Broadcom.
Nvidia: The market leading in data center GPUs and AI chips
Nvidia graphics processing units (GPUs) are the gold standard in rendering realistic computer graphics and accelerating complex data center workloads like artificial intelligence (AI) applications. Nvidia also provides adjacent data center hardware, such as central processing units (CPUs) and networking equipment, as well as subscription software and services that support graphics and AI workflows.
Nvidia holds more than 95% market share in workstation graphics processors and more than 90% market share in data center GPUs. Additionally, regarding AI specifically, The Wall Street Journal recently reported that "Nvidia's chips underpin all of the most advanced AI systems, giving the company a market share estimated at more than 80%." Looking ahead, Nvidia is unlikely to lose its leadership position anytime soon because it has a durable competitive advantage in CUDA.
Nvidia CUDA is a programming model lets GPUs (originally designed for graphics applications) accelerate all sorts of data center computing tasks. The CUDA ecosystem comprises hundreds of software libraries (building blocks) that streamline model training and application development. No other chipmaker has a comparable ecosystem of supporting software. In other words, competitors not only need to overcome the superior performance of Nvidia hardware, but also the immense convenience afforded to developers by Nvidia software.
Nvidia reported blockbuster financial results in the first quarter. Revenue increased 262% to $26 billion and non-GAAP net income soared 461% to $6.12 per diluted share. Nvidia is set to maintain that momentum as the AI market grows. In fact, CFRA analyst Angelo Zino recently said Nvidia "will be the most important company to our civilization over the next decade."
Additionally, rapid innovation should keep the company ahead of its peers. Nvidia Blackwell GPUs offer four times faster AI training and 30 times faster AI inferencing as compared to the previous Hopper generation. Rosenblatt analyst Han Mosesmann recently said, "The new Blackwell GPU platform, which ramps up later in 2024, is likely the most ambitious project Silicon Valley has ever witnessed."
Wall Street expects Nvidia to grow earnings per share at 33% annually over the next three to five years. That makes its current valuation of 68 times adjusted earnings look a little expensive, but not unreasonably so. Investors should be prepared to pay a premium if they want to own this stock.
Personally, I am skeptical about Nvidia achieving a $10 trillion market capitalization by 2030. I certainly believe it's possible, but many things would have to go right for the company. That said, I do believe Nvidia will beat the S&P 500 over the next three to five years, so patient investors should consider buying a small position today.
Broadcom: The market leader in ASICs and networking chips
Broadcom breaks its business into semiconductor solutions and infrastructure software. The company earns semiconductor solutions revenue by developing chips for wired and wireless networking, data center storage, and other end markets. Broadcom also develops application specific integrated circuits (ASICs), chips purpose-built for specialized use cases like artificial intelligence. Additionally, Broadcom earns infrastructure software revenue from cybersecurity, monitoring, and virtualization products.
Broadcom is the leading provider of ASICs with 35% market share, while its closest competitor Marvell Technology holds 12% market share. It is also the leader in networking and wireless chips. That puts Broadcom in a good position because AI adoption is driving demand for ASICs and networking chips. Analysts at Goldman Sachs recently wrote, "Alongside Nvidia, we view Broadcom as a critical piece to the ongoing AI infrastructure build-out."
Broadcom reported solid financial results in the second quarter, beating estimates on the top and bottom lines. Revenue surged 43% to $12.5 billion on particularly strong demand for AI chips and virtualization software. Meanwhile, GAAP net income declined 46% to $4.42 per diluted share, but that was due to costs associated with its 2023 acquisition of VMware . Non-GAAP operating income increased 32% during the second quarter.
Broadcom is a hidden gem among AI stocks because Nvidia casts a long shadow. But its strong position in ASICs and networking chips should be a source of momentous revenue growth in the coming years. Indeed, management expects AI chips to account for 25% of its semiconductor solutions revenue in 2025, up from 15% in 2023.
However, Wall Street expects the company to grow earnings per share at 17% annually over the next three to five years. That makes its current valuation of 69 times earnings look expensive, especially when the three-year average is 32 times earnings. To be fair, earnings may grow more quickly than anticipated depending on how the VMware integration progresses. But I plan to avoid the stock until the valuation appears more reasonable. To that end, I see little chance of an 70% return over the next 12 months.
Trevor Jennewine has positions in Nvidia. The Motley Fool has positions in and recommends Goldman Sachs Group and Nvidia. The Motley Fool recommends Broadcom and Marvell Technology. The Motley Fool has a disclosure policy .
Most Popular
Comments / 0