These Wall Street analysts see substantial upside potential for artificial intelligence stocks Nvidia and Broadcom.
Semiconductor Company Nvidia (NVDA -0.36%) completed a 10-for-1 stock split in June, and another chipmaker Broadcom (AVGO 1.19%) has a 10-for-1 stock split scheduled for July. Savvy investors have been gravitating toward both stocks. A company’s stock price tends to rise about twice as fast as the S&P500 (^GSPC -0.41%) during the year following the announcement of a stock split.
Indeed, some Wall Street analysts see substantial upside potential in Nvidia and Broadcom.
- I/O Fund’s Beth Kendig expects Nvidia to reach a market cap of $10 trillion by 2030. This forecast implies an upside of around 230% from its current market cap of $3 trillion dollars.
- Joseph Moore at Morgan Stanley Broadcom has set an bullish price target that values Broadcom at $2,292 per share by June 2025. This price will increase to $229.20 per share after the stock split. Either way, this forecast implies a 70% upside from its current price of $1,605 per share.
Here’s what investors should know about Nvidia and Broadcom.
Nvidia: Market leader in GPUs and AI chips for data centers
Nvidia graphics processing units (GPUs) are the gold standard for rendering realistic computer images and accelerating complex data center workloads, such as artificial intelligence (AI) applications. Nvidia also provides adjacent data center hardware, such as central processing units (CPUs) and networking equipment, as well as software and subscription services that support graphics and AI workflows.
Nvidia has over 95% of the workstation GPU market share and over 90% of the data center GPU market share. Additionally, when it comes to AI in particular, the Wall Street Journal recently reported that “Nvidia’s chips underpin all of the most advanced AI systems, giving the company market share estimated at more than 80%. Looking ahead, Nvidia is unlikely to lose its leadership position in the near future as it has a sustainable competitive advantage in the CUDA space.
Nvidia CUDA is a programming model that allows GPUs (originally designed for graphics applications) to accelerate all kinds of computing tasks in data centers. The CUDA ecosystem includes hundreds of software libraries (building blocks) that streamline model training and application development. No other chipmaker has a comparable ecosystem of support software. In other words, competitors must not only overcome the superior performance of Nvidia hardware, but also the immense convenience offered to developers by Nvidia software.
Nvidia announced exceptional first quarter financial results. Revenue rose 262% to $26 billion and non-GAAP net income soared 461% to $6.12 per diluted share. Nvidia is determined to maintain this momentum as the AI market grows. In fact, CFRA analyst Angelo Zino recently said that Nvidia “will be the most important company in our civilization over the next decade.”
Additionally, rapid innovation should keep the company ahead of its peers. Nvidia Blackwell GPUs deliver four times faster AI training and 30 times faster AI inference than the previous Hopper generation. Rosenblatt analyst Han Mosesmann recently said: “The new Blackwell GPU platform, which will be rolled out later in 2024, is probably the most ambitious project Silicon Valley has ever seen. »
Wall Street expects Nvidia to grow its earnings per share by 33% annually over the next three to five years. That makes its current valuation of 68 times adjusted earnings a little expensive, but not unreasonably so. Investors should be willing to pay a premium if they want to own this stock.
Personally, I’m skeptical that Nvidia will reach a $10 trillion market cap by 2030. I certainly believe it’s possible, but a lot would have to go right for it. business. That said, I 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: market leader in ASICs and network chips
Broadcom operates in two segments: Semiconductor Solutions and Infrastructure Software. The company derives its Semiconductor Solutions revenue from developing chips for wired and wireless networking, data center storage, and other end markets. Broadcom also develops application-specific integrated circuits (ASICs), chips specifically designed for specialized use cases such as artificial intelligence. In addition, Broadcom derives its Infrastructure Software revenue from cybersecurity, surveillance, and virtualization products.
Broadcom is the leading ASIC provider with 35% market share, while its closest competitor Marvell Technology holds 12% market share. It is also the leader in networking and wireless chips. This puts Broadcom in a good position as AI adoption drives demand for ASICs and networking chips. Analysts at Goldman Sachs recently wrote: “Alongside Nvidia, we see Broadcom as a critical part of today’s AI infrastructure development.”
Broadcom reported strong second-quarter financial results, beating estimates for both revenue and net income. Revenue jumped 43% to $12.5 billion on particularly strong demand for AI chips and virtualization software. Meanwhile, GAAP net income decreased 46% to $4.42 per diluted share, but this was due to costs associated with the VMware acquisition in 2023. Non-GAAP operating income increased 32% as of during the second trimester.
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 considerable revenue growth in the years ahead. Indeed, management expects AI chips to account for 25% of its semiconductor solutions revenue in 2025, up from 15% in 2023.
Wall Street, however, expects the company’s earnings per share to grow 17% annually over the next three to five years. Its current valuation of 69 times earnings therefore seems expensive, especially when the three-year average is 32 times earnings. To be fair, earnings could grow faster than expected depending on how VMware’s integration progresses. But I plan to avoid the stock until the valuation looks more reasonable. In this regard, I see little chance of achieving a 70% return over the next 12 months.
Trevor Jennewine holds positions at Nvidia. The Motley Fool holds positions in and recommends Goldman Sachs Group and Nvidia. The Motley Fool recommends Broadcom and Marvell Technology. The Motley Fool has a disclosure policy.