Overlooked Opportunity in Nvidia: One Straightforward Artificial Intelligence (AI) Shares to Secure Before It Outperforms the Market in 2025, and Beyondwards

Overlooked Opportunity in Nvidia: One Straightforward Artificial Intelligence (AI) Shares to Secure Before It Outperforms the Market in 2025, and Beyondwards

Nvidia (NVDA shedding -2.33%) holds the number one spot in the market for data center GPUs, primarily used in AI training and inference. Estimates suggest that Nvidia holds an astounding 90% share of this market. This dominant position has enabled the tech giant to deliver stellar growth to investors in recent years, primarily due to its impressive revenue and earnings expansion.

However, the meteoric rise in Nvidia's stock price has made it quite expensive. Currently, Nvidia sports a price-to-sales ratio of 29, a high figure considering the U.S. tech sector's average sales multiple of 8.2. The earnings multiple of 54 isn't exactly cheap either.

Despite the price tag, Nvidia's remarkable growth justifies its rich valuation multiples. It's also important to note that the gargantuan market opportunity that Nvidia has at its disposal explains why it can keep justifying its valuation and deliver even more upside in the future.

It's not just Nvidia that's making waves in the AI chip market. Another leading AI semiconductor stock is also seeing impressive growth and boasts a more attractive price compared to Nvidia. This company recently released its quarterly earnings, leading to a significant surge in its stock price.

Let's examine why this stock is continuing its winning streak in the AI sector, with a focus on how it will perform in 2025.

Broadcom's growth gains momentum thanks to the robust demand for custom AI chips

Broadcom (AVGO shedding -1.59%) reported its fiscal 2024 fourth-quarter results (for the quarter ending Nov. 3) on Dec. 12. Broadcom's revenue jumped 51% year over year to $14 billion, while non-GAAP earnings increased by 28% to $1.42 per share. Market expectations pointed to earnings of $1.39 per share, and Broadcom's revenue almost matched Wall Street's projections.

Broadcom's organic revenue growth (excluding the revenue from the VMware acquisition completed in November 2023) came in at 9%. Broadcom has set a revenue target of $14.6 billion for the first quarter of fiscal 2025, representing a 22% improvement over the same period last year. Additionally, Broadcom anticipates adjusted EBITDA to reach 66% of revenue, a substantial increase compared to the year-ago period's reading of 60% of revenue.

AI plays a key role in driving the robust expansion in Broadcom's top and bottom lines. The company ended fiscal 2024 with AI-related revenue of $12.2 billion, a substantial increase from the $3.8 billion it generated from this segment in the previous fiscal year. Broadcom expects its AI revenue to continue growing at a healthy pace in the current fiscal year as well.

Broadcom forecasts a 65% year-over-year increase in AI-related revenue in the current quarter to $3.8 billion, making up 26% of its overall revenue. AI is now a significant driver for Broadcom, and this trend is expected to continue due to the substantial market opportunity that Broadcom sees for custom AI processors and networking chips.

Broadcom management mentioned on the company's latest earnings call that the addressable market for custom AI and networking chips is expected to range from $60 billion to $90 billion by fiscal 2027. Even at the lower end, the opportunity is five times the AI revenue that Broadcom generated in the latest quarter.

Broadcom is in a strong position to capture a major share of this addressable market, given its dominance in the custom chip market, officially known as application-specific integrated circuits (ASICs). Reports suggest that Broadcom controls between 55% and 60% of this space, according to JPMorgan. As a result, Broadcom's AI-specific revenue is likely to grow at an incredible pace over the next three years.

Faster earnings growth could fuel further gains

Following its latest earnings report, analysts have revised their growth projections for Broadcom. This is clearly evident from the graph below.

Broadcom's revenue for the current fiscal year, which commenced last month, is projected to grow 19% from the previous year's figure of $51.5 billion. Additionally, its earnings are expected to increase by 28% to $6.25 per share, a significant increase compared to the previous fiscal year's earnings growth of 15%.

However, there is a good possibility that Broadcom may surpass these estimates due to the substantial market opportunity and its dominant position in this space. It is, therefore, not surprising to see Broadcom stock continuing its stellar performance in 2025 and beyond, given that it is expected to maintain healthy double-digit growth rates for the next couple of fiscal years.

This makes Broadcom an attractive AI stock to buy right now, particularly considering it has a PEG ratio of just 0.72, according to Yahoo Finance (based on the expected earnings growth it is expected to deliver over the next five years). This is slightly lower than Nvidia's PEG ratio of 0.82.

In conclusion, investors seeking an alternative to Nvidia should consider Broadcom as it offers the potential for substantial gains while offering slightly more value compared to expected growth over the next five years.

Nvidia's expensive valuation multiples have led some investors to explore alternative AI chip stocks with more attractive pricing. Broadcom, for instance, has seen impressive growth in its AI-related revenue, with estimates suggesting a 65% increase in AI revenue in the current quarter.

Broadcom's robust demand for custom AI chips and its dominant position in the application-specific integrated circuits (ASICs) market position it well to capture a significant share of the projected $60 billion to $90 billion market opportunity for custom AI and networking chips by 2027. This substantial market potential, coupled with a lower PEG ratio compared to Nvidia, makes Broadcom an attractive AI stock for investors seeking potential gains while prioritizing value.

Read also: