There is no doubt that Nvidia (NVDA -2.55%) is the dominant player in the market for artificial intelligence (AI) chips, as its graphics processing units (GPUs) have played a central role in training popular AI models such as ChatGPT and Llama.
The company’s terrific technological lead in the AI GPU space has given it a wide moat, and its rivals remain way behind it when it comes to selling AI GPUs. As a result, Nvidia’s data center revenue rose by a remarkable 112% year over year in the third quarter of its fiscal 2025 to a record $30.8 billion, while AMD‘s revenue from this segment came in at just $3.5 billion in its most recently reported quarter.
At the same time, some investors seem a tad concerned about the relative slowdown in Nvidia’s growth. Though the company’s total revenue increased an impressive 94% year over year in the previous quarter to $35.1 billion, that was slower than the 122% year-over-year increase Nvidia reported in the second quarter of its fiscal 2025.
The market’s outlook for the current quarter points toward a 70% year-over-year increase in revenue. Additionally, Nvidia is trading at an expensive valuation. That may lead investors to look for alternative ways to capitalize on the growth of the AI chip market. That’s why now would be a good time to take a closer look at a company that has been touted as the next best bet after Nvidia on the booming AI chip market.
This stock has already delivered impressive gains this year, and it seems poised to fly higher after the company releases its fiscal 2024 fourth-quarter results on Thursday.
Custom AI chip demand is powering this company’s growth
Broadcom (AVGO -0.33%) has been called the second-most-important AI chip company. It’s the dominant player in application-specific integrated circuits (ASICs), a type of custom chip that’s gaining prominence in AI because of its lower cost and power efficiency compared to the GPUs that Nvidia sells.
More specifically, Broadcom controls an estimated 55% to 60% of the market for ASICs.
According to a forecast by analysts at market research firm Lucitel, demand for AI-specific ASICs will grow at an annualized rate of 32% through the end of the decade. That bodes well for Broadcom. Moreover, JPMorgan analyst Harlan Sur believes that the cumulative revenue opportunity for Broadcom in the custom AI chip market stands at a staggering $150 billion.
This helps explain why Broadcom management has been raising its AI-specific revenue guidance. The company expects to end this fiscal year with AI chip revenue of $12 billion, up from its earlier outlook of $11 billion. For comparison, generative AI accounted for 15% of Broadcom’s fiscal 2023 semiconductor revenue of $28 billion — just $4.2 billion.
So, Broadcom’s AI revenue is on track to nearly triple in just one year, and given its massive opportunity in the custom AI chip market, it is only at the beginning of a terrific growth curve in this space. Additional upbeat news on this front could send Broadcom stock soaring even further when it delivers its quarterly report on Thursday.
Broadcom seems likely to deliver better-than-expected results
The consensus estimate from analysts following the chipmaker is for $14.06 billion in revenue in fiscal Q4, which would be a 51% increase from the prior year. Importantly, that includes the revenue contribution from VMware, which it acquired in November 2023. That revenue projection is in line with Broadcom’s estimate of $14 billion. However, as the company has increased its full-year revenue forecast, there is a solid chance that its top line will land ahead of Wall Street’s expectations.
Analysts are expecting its adjusted earnings to jump to $1.39 per share from $1.11 per share in the year-ago period, which would be a solid increase of 25%. However, given the increase in its AI revenue guidance, its bottom line should ideally be better than Wall Street’s expectations.
At the same time, Broadcom’s dominant position in the fast-growing custom AI chip market should allow management to deliver robust guidance for its fiscal 2025, especially considering that it is looking to push the technological envelope in this space. Management recently pointed out that Broadcom has developed new tech to speed up its custom AI chips and pack more memory into them using the advanced chip packaging technology of its foundry partner, TSMC.
Broadcom trades at around 29 times forward earnings right now, almost in line with the average multiple of the tech-laden Nasdaq-100 index. That’s an attractive valuation for this semiconductor stock. Investors should consider grabbing this opportunity soon, since the stock is likely to fly higher after its quarterly report.
JPMorgan Chase is an advertising partner of Motley Fool Money. Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, JPMorgan Chase, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
