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Wall Street is talking up Broadcom as an Nvidia disruptor and one of the reasons for this is the diverging stock performance of these two stocks since the political temperature cooled down in the US after election day. Broadcom is up 18% since then while Nvidia is down 12%.
The market thinks custom chips are the future. Companies like Alphabet and META are building their own chips for AI, something Broadcom specializes in. Some analysts believe this is the future of chip manufacturing and poses a real threat to Nvidia, which mostly makes its own versions of GPUs, thus concentrating its focus on improving its own tech.
These analysts are worried that Broadcom’s performance in the recent quarter means trouble for Nvidia. We believe that is not the case. Broadcom works in the custom chips segment, making chips for companies on demand. When companies order GPUs from Broadcom, these companies have to arrange the networking equipment, software, and labor themselves. These GPUs are so complicated and advanced that only a handful of big companies can afford to deploy these GPUs.
Compare that to Nvidia which not only provides the networking equipment through Mellanox but also offers its own software and programming language called CUDA. Moreover, most of the AI industry experts today are trained in CUDA. This means Nvidia is the go-to choice for most companies, except a select few with deep pockets.
This also means Broadcom’s business is not as scalable as Nvidia’s. Broadcom will continue to serve Big Tech, but smaller businesses cannot afford custom chips. As a result, Broadcom is unable to penetrate the same market that Nvidia does. We’re bullish on Nvidia because of this unique economic moat that the chipmaker enjoys.
There is one argument in Broadcom’s favor that investors need to keep an eye on though. If only Big Tech can afford custom chips, is responsible for a big chunk of all AI spending, and the spending is predicted to cross $1 trillion in the coming years, it means Broadcom does indeed stand to gain at Nvidia’s expense.
However, we already covered two unique growth drivers for Nvidia (NVDA) previously. There is no denying the fact that Broadcom enjoys a good position in the industry at this point, but it doesn’t in any way dent Nvidia’s long-term bull thesis.
Nvidia is 5th on our latest list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 193 hedge fund portfolios held NVDA at the end of the third quarter which was 179 in the previous quarter. While we acknowledge the potential of NVDA as a leading investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is as promising as NVDA but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.