When it came to artificial intelligence (AI) infrastructure in 2024, Nvidia(NASDAQ: NVDA) reigned supreme. However, Broadcom(NASDAQ: AVGO) will be looking to challenge the chipmaker in 2025.
Both stocks have had strong runs in 2024, with Nvidia's stock up over 170% year to date as of this writing and Broadcom up around 107%. Let's consider which semiconductor stock looks like the better buy heading into 2025.
AI infrastructure growth
Since the start of the AI boom, Nvidia has been the biggest winner. As the maker of graphics processing units (GPUs) the company's chips became the backbone of AI infrastructure. Training large language models (LLMs) and running AI inference take a lot of computing power, and GPUs have proven to be the best chips for these tasks as they are able to perform many calculations at the same time in what is called parallel processing.
Nvidia, meanwhile, became the market leader in GPUs due to its CUDA software platform. The company originally developed the free software to allow developers to program its chips for tasks beyond speeding up the graphics rendering in things like video games, the job for which they were initially created, in order to sell more chips. As a result, CUDA became the program on which developers learned to train GPUs, which is what has helped create the large moat the company sees today. It currently has about a 90% market share in GPUs as a result.
The combination of its powerful GPUs and wide moat due to CUDA led the company to see astronomical growth as large tech companies race to develop more powerful AI models. Through the first nine months of its fiscal 2025 ending in January 2025, Nvidia's revenue surged 135% to $91.2 billion, while last quarter its revenue soared 94% to $35.1 billion.
With AI models needing exponentially more computing power as they become more advanced, Nvidia's future growth prospects also look promising. In fact, recent iterations of Alphabet's Llama AI model and xAI's Grok model are being trained using up to 10 times as many GPUs as their predecessors. At the same time, Nvidia's hyperscale customers (those that own huge data centers) have indicated they plan to increase their spending on AI infrastructure next year as they see AI as a generational opportunity. For their part, analysts are projecting the company will grow its revenue by just over 50% next year.
Image source: Getty Images.
While Nvidia is dominating the AI chip space, Broadcom is making inroads by helping customers develop custom AI chips. Its application-specific integrated circuits, or ASICs, are designed specifically for a customer's precise needs and can help with improved performance and more efficient power consumption.
Alphabet was the first company to use Broadcom's technology and expertise to develop its own custom AI chip. The result is a tensor-processing unit (TPU) called Trillium designed specifically to work within Google's TensorFlow (a software library for AI and machine learning). Alphabet said these TPUs have several features, such as a matrix multiply unit (MXU) and proprietary interconnect topology, that differentiate them from mass-merchant GPUs and make them ideal for accelerating AI training and inference.
While there were some reports that Alphabet was looking to just go on its own without Broadcom's help, Broadcom won the design contract for the next generation of Alphabet's TPUs. Meanwhile, the company gained four more custom AI chip customers. Meta Platforms and TikTok owner ByteDance are widely believed to be the company's established customers, while OpenAI and more recently Apple are thought to be recent customer wins.
On its latest earnings call, Broadcom said its three largest custom AI chip customers had an addressable market of between $60 billion to $90 billion in fiscal 2027 alone and that they were planning on deploying 1 million of its custom AI chips by 2027. Meanwhile, it said its two newer AI chip customers could add to that total. As a reference, it took Alphabet 15 months to have its custom TPUs designed and deployed within its data centers.
While the AI opportunity for Broadcom is large, there is a big difference between an addressable market and expected revenue. The company is also involved in a lot of semiconductor and software businesses outside of AI, which aren't growing as quickly. The company grew organic revenue just 11% last quarter when excluding its acquisition of VMware, and analysts are currently looking for the company to increase its revenue by 18% this fiscal year, ending Oct. 31, 2025, and 14% the year after.
Valuation and verdict
Nvidia currently trades at a cheaper valuation than Broadcom with a forward price-to-earnings (P/E) ratio of about 30 compared to over 33 for Broadcom. Meanwhile, Nvidia is currently growing its revenue much faster, which is expected to continue in 2025. In addition, Nvidia holds about $30 billion in net cash, while Broadcom has $48.3 billion in net debt.
Broadcom created a lot of hype with its comments on its AI addressable market, which have powered its stock price in December. Meanwhile, Nvidia's stock struggled to close out the year. But while Broadcom grabbed the momentum, Nvidia is now the cheaper stock and it's still expected to grow its revenue much more quickly in the near term.
Broadcom management has certainly put some doubt in investors' minds when it comes to who will be the big AI chip winner in the coming years. But Broadcom's gains won't necessarily come at Nvidia's expense. GPUs still have more versatility than custom chips and are still considered the standard. However, companies also want an option other than Nvidia to make sure it doesn't become too powerful.
I think both stocks have the potential to be winners in 2025, but I prefer Nvidia at this point given its current superior growth and cheaper valuation.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Geoffrey Seiler has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet, Apple, Meta Platforms, and Nvidia. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
