Get to know the latest artificial intelligence (AI) chip stocks and join Nvidia in the $1 trillion club

No chipmaker has benefited more from the rapid increase in artificial intelligence (AI) spending than Nvidia (NASDAQ:NVDA). The company’s graphics processing units (GPUs) are critical for any company looking to develop and train large language models and build generative AI applications.

Nvidia surpassed $1 trillion in May 2023. Since then, the company has more than tripled in size, making it one of only three companies with a market cap of over $3 trillion. But Nvidia isn’t the only company seeing its market cap skyrocket as AI spending booms. In fact, AI advances are virtually inextricably linked to the success of almost all companies worth over a trillion dollars. It’s no different with the newest member, which both complements and competes with Nvidia.

The newest artificial intelligence chip in the $1 trillion club is Broadcom (NASDAQ:AVGO). The stock passed that milestone following a stellar fourth-quarter earnings report on Dec. 12. Here’s how the company became a leading 13-figure AI chip maker.

A graphic of a computer chip in a circuit with the letters AI written on it. — Image source: Getty Images.

Broadcom is a well-diversified company. It has an enterprise software segment led by VMWare and Symantec. In addition, semiconductors are manufactured for applications such as cell phones, Wi-Fi and Bluetooth. But what really drives the business are two specialized semiconductor applications: its networking chips and its AI accelerators.

Broadcom’s network chips are essential infrastructure for AI data centers. While hyperscalers pay billions for Nvidia’s GPUs, they need Broadcom’s chips to get the most out of their computing power. Broadcom’s Tomahawk and Jericho switches ensure data moves from one server to another quickly and efficiently. This means less redundancy and processing downtime. And when you’re trying to make the most of billions of dollars worth of chips, every second counts.

There is no company that can even come close to matching Broadcom’s technology in developing these chips. Additionally, no one in charge of a hyperscale data center will risk their job by switching to a competitor’s offering, no matter how much money it might save the company. As data centers increase the number of expensive GPUs and other chips in their server racks, Broadcom’s business has grown exponentially.

The business with customized AI accelerators is even more promising. This is the next generation of AI chips.

Broadcom is working with several companies to develop custom AI chips for their data centers. The three largest customers are alphabet, Metaplatformsand TikTok parent ByteDance. Management estimates that these three companies will represent an addressable market of $60 billion to $90 billion by 2027. Given all three companies’ potential gains from advances in AI, the high end of that number seems more likely than the low end.

Management also announced that it has signed contracts with two new customers to build their own next-generation chips. Broadcom does not want to disclose details, but many assume that these are customers Apple and OpenAI.

Apple is familiar with Broadcom’s work. It used Google’s TPUs to train Apple Intelligence. Apple’s big push to integrate system-level AI into its devices could see the company quickly become Broadcom’s largest customer. This leaves tremendous upside potential for management’s prospects for the addressable market, which does not include new customers.

In fact, Broadcom, with its networking chips and AI accelerators, appears well-positioned to benefit from the maturing development of artificial intelligence. In the future, management plans to divide semiconductor reporting into AI and non-AI segments. The former’s growth will impact the results of the entire company for the foreseeable future.

Although shares rose more than 24% after the company reported its fourth-quarter results, the company’s outlook remains good enough to justify its current price.

Management’s forecast for an addressable market of $60 billion to $90 billion represents a compound annual growth rate for the AI semiconductor segment of more than 60%. And with the addition of two potential new customers, growth could be significantly higher by 2027.

While AI semiconductors still make up a small part of Broadcom’s business today, they are the driving force for the company’s future. Even after AI sales tripled in 2024, management still expects AI chips to account for about a quarter of the company’s total sales in the first quarter of 2025. But as AI chips become a larger part of Broadcom’s business and continue to grow rapidly, the company’s earnings growth should remain strong at this rate for a very long time. Analysts currently expect earnings growth of 28% next year and 20% in 2026.

Therefore, investors should be willing to pay a higher valuation today for a stock whose earnings are already growing strongly. As of this writing, shares are trading at around 36 times forward earnings. This is definitely a premium price and investors should consider the risks of investing at this price. In particular, AI spending may not continue at the rapid pace of the past two years. But the stock was trading at a similar valuation in early 2024, and management just showed why it was worth the price then. Investors looking for an alternative to Nvidia should consider Broadcom for their portfolios.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, former director of market development and spokesperson for Facebook and sister of Mark Zuckerberg, CEO of Meta Platforms, is a member of The Motley Fool’s board of directors. Adam Levy holds positions at Alphabet, Apple and Meta Platforms. The Motley Fool has positions in and recommends Alphabet, Apple, Meta Platforms and Nvidia. The Motley Fool recommends Broadcom. The Motley Fool has one Disclosure Policy.

Meet the latest artificial intelligence (AI) chip set to join Nvidia in the $1 trillion club. The stock was originally published by The Motley Fool

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