The rapid expansion of the artificial intelligence (AI) market is generating strong tailwinds for many chipmakers. Nvidia, the leading producer of high-end data center GPUs, has probably been the biggest winner. Its stock has soared by about 2,470% over the past five years.
Nvidia continues to have potential as a great long-term investment in the future of the AI market, but investors shouldn't overlook two other chipmakers that are expected to profit from this secular trend: Wolfspeed(NYSE: WOLF), a leading manufacturer of silicon carbide chips, and diversified tech giant Broadcom(NASDAQ: AVGO).
Let's consider which of these two artificial intelligence stocks is the better buy today.
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The differences between Wolfspeed and Broadcom
Wolfspeed, which was formerly known as Cree, mainly manufactures wide-bandgap (WBG) semiconductors made from silicon carbide and gallium nitride. These chips can operate at higher voltages, temperatures, and frequencies than traditional chips, which are made using silicon and gallium arsenide.
Their superior robustness makes Wolfspeed's chips ideal for short-length LEDs, lasers, 5G base stations, and military radars. They're also used in electric vehicles (EVs), solar panels, wind turbine systems, and power supply units for AI servers. There is demand for these chips, however, the sluggishness of the EV market has throttled Wolfspeed's growth over the past two years.
Broadcom, which was known as Avago before it acquired the original Broadcom and inherited its brand in 2016, is more diversified. Its semiconductor division sells a wide range of chips for the mobile, wireless, networking, data storage, and industrial markets. Its infrastructure software business -- which it expanded through its acquisitions of CA Technologies, Symantec's enterprise security division, and VMware -- provides a mix of on-premises and cloud-based software.
Most of Broadcom's recent growth has been driven by the AI market, which drove data center operators to purchase more of its networking and optical chips. Management expects that segment's growth will offset slower sales of non-AI chips and infrastructure software.
Which chipmaker is growing faster?
Wolfspeed's revenue rose 42% in its fiscal 2022 (which ended in June 2022) as it lapped a pandemic-related slowdown and benefited from rising EV sales. But its revenues only rose 24% in fiscal 2023 and 6% in fiscal 2024.
That deceleration was caused by the cooling EV market, a surge in spending on AI GPUs that came at the expense of silicon carbide chips, and China's export bans on gallium and germanium amid an escalating tech sector conflict. Wolfspeed's adjusted gross margin plunged from 36% in fiscal 2022 to 13% in fiscal 2024, and it remains unprofitable on a generally accepted accounting principles (GAAP) basis. For fiscal 2025, analysts expect Wolfspeed's revenue to dip 2% to $790 million, and foresee its net loss widening to $975 million.
Yet Wolfspeed continues to expand during this cyclical downcycle. It expanded its New York and North Carolina plants over the past two years, and it expects that increased utilization will reduce its overall die costs by at least 50% over the next few years. That strategy could eventually pay off, but the recent dismissal of CEO Gregg Lowe could disrupt those long-term plans.
Broadcom's revenue rose by 21% in its fiscal 2022 (which ended in October 2022) as pandemic-related headwinds dissipated, then grew 8% in fiscal 2023 and 44% in fiscal 2024. Last year's top-line acceleration was largely driven by its acquisition of the cloud software giant Vmware, which closed in November 2023, and the rising sales of its AI-oriented data center chips -- which more than tripled to $12.2 billion to account for 24% of its top line.
In fiscal 2025, analysts expect its revenue to rise by 19% and its GAAP EPS to more than triple. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) -- a metric that filters out the noise from its acquisitions -- is expected to grow by 26%.
Which stock is the better value?
With an enterprise value of $6.1 billion, Wolfspeed doesn't look like a bargain at 8 times this year's sales. Broadcom, with an enterprise value of $1.13 trillion, might initially seem pricier at 19 times this year's sales -- but it still looks reasonably valued at 28 times its adjusted EBITDA. Wolfspeed's adjusted EBITDA is still negative.
Neither of these stocks is cheap, but Broadcom is clearly a better buy right now. It's bigger, better diversified, growing faster, consistently profitable, and more heavily exposed to the booming AI market than Wolfspeed. Wolfspeed's business might eventually bounce back, but for that to occur, it will need the EV market to heat up and for its infrastructure upgrades to gradually reduce its costs over the next few years. It will also need to hire a new permanent CEO who can provide a clearer roadmap for its future.
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Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia and Wolfspeed. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
