Explore the Latest Artificial Intelligence (AI) Chip Company Sharing the $1 Trillion Market with Nvidia

Explore the Latest Artificial Intelligence (AI) Chip Company Sharing the $1 Trillion Market with Nvidia

No tech company has profited more from the surge in artificial intelligence (AI) expenditure than Nvidia (NVDA 4.45%). Their graphics processing units (GPUs) are crucial for any company seeking to establish and educate huge language models or develop generative AI applications.

Nvidia surpassed the $1 trillion mark in May 2023. Since then, its value has more than tripled, making it one of only three companies with a market capitalization exceeding $3 trillion. However, Nvidia isn't the only company to see its market capitalization skyrocket due to the AI spending boom. In fact, AI advancements are nearly inseparable from the success of almost every company valued over a trillion dollars. The latest addition, which competes and collaborates with Nvidia, is no exception.

The most recent AI chip stock to join the $1 trillion club is Broadcom (AVGO 0.25%). It achieved this milestone following an impressive fourth-quarter earnings report on Dec. 12. Here's how Broadcom became a major AI chipmaker worth billions.

The company creating the future generation of AI chips

Broadcom is a diversified business, encompassing an enterprise software segment led by VMWare and Symantec, as well as semiconductors for applications such as wireless phones, WiFi, and Bluetooth. However, what's driving the company's growth are two specialized semiconductor applications: its networking chips and its AI accelerators.

Broadcom's networking chips are vital infrastructure for AI data centers. While hyperscalers spend billions on Nvidia's GPUs, they require Broadcom's chips to fully utilize their processing power. Broadcom's Tomahawk and Jericho switches ensure that data is transferred quickly and efficiently between servers, resulting in less redundancy and downtime. And with the billions of dollars invested in processing power, every second counts.

Broadcom's networking chip technology is unparalleled. Moreover, no one in charge of a hyperscale data center would risk their job by switching to a competitor's offering, no matter the potential savings. As data centers expand their GPU and chip installations, Broadcom's business has grown exponentially.

The company's AI accelerator business is even more promising. These are the next-generation AI chips.

Broadcom collaborates with several companies to create custom AI chips for their data centers. Its three largest clients are Alphabet, Meta Platforms, and TikTok parent ByteDance. Management estimates that these three companies will represent an addressable market between $60 billion and $90 billion by 2027. Given the potential gains these companies can achieve through AI advancements, the high end of this range seems more likely than the low end.

Management also announced deals with two new clients developing their own next-generation chips. Broadcom won't disclose the details, but several believe these clients to be Apple and OpenAI.

Apple is familiar with Broadcom's work. It used Google's TPUs to train Apple Intelligence. Apple's ambitious plans to incorporate AI into its devices at the system level could make it Broadcom's largest client soon. This leaves significant room for growth in management's addressable market projection, which does not include the new clients.

Indeed, with its networking chips and AI accelerators, Broadcom appears well-positioned to profit from the evolution of artificial intelligence. In the future, management plans to split its semiconductor reporting into AI and non-AI segments. The growth of the former will fuel the overall business for the foreseeable future.

There's still time to invest

Despite shares rising more than 24% following the company's fourth-quarter earnings report, the business's prospects remain strong enough to justify the current price.

Management's $60 billion to $90 billion addressable market assessment represents a compound annual growth rate for the AI semiconductor segment of over 60%. With the potential of two new clients, growth could be significantly higher by 2027.

While AI semiconductors account for a small portion of Broadcom's business now, they are the primary driver of its future. Even after tripling AI sales in 2024, management still expects AI chips to account for roughly a quarter of the company's total revenue in the first quarter of 2025. As AI chips become a larger part of Broadcom's business and continue to grow at a rapid pace, the company's earnings growth should remain strong for an extended period. Analysts expect earnings growth of 28% in 2025 and 20% in 2026.

As a result, investors should be prepared to pay a premium for a stock that's already growing earnings at a strong pace. Shares trade for about 36 times forward earnings as of this writing. That's definitely a premium price, and investors should consider the risks associated with purchasing at this price. Specifically, AI spending may not continue at its current breakneck pace. However, the stock traded at a similar valuation earlier in 2024, and management demonstrated why it was worth the price then. Investors looking for an alternative to Nvidia might want to consider Broadcom for their portfolios.

1. Investors looking for alternative companies to invest in the booming AI market might find interest in Broadcom, as its AI accelerator business is projected to grow significantly, potentially making it Broadcom's largest revenue contributor by 2025.
2. Broadcom's strategic partnerships with major tech companies like Alphabet, Meta Platforms, TikTok parent ByteDance, and potential clients such as Apple and OpenAI, position it well to capitalize on the substantial investment in artificial intelligence finance, offering a promising investment opportunity for those seeking to invest in this dynamic sector.

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