On Nov. 30, 2022, a start-up called OpenAI changed the world following the introduction of its large language model (LLM), ChatGPT. In the two years since ChatGPT's debut, the S&P 500 and Nasdaq Composite have posted total returns of 52% and 70%, respectively.
One of the biggest winners in the AI revolution is semiconductor stock Nvidia, which has gained an eye-popping 717% since the release of ChatGPT -- a move that's propelled it to become one of the world's most valuable companies by market capitalization.
It's obvious that investors have been celebrating Nvidia during this AI frenzy. But if you think about the bigger picture, you may find yourself asking about other opportunities in the chip realm that could also be attractive. After all, how much longer can Nvidia stock keep climbing?
Well, thanks to a form called the 13F, investors are able to get an idea of what stocks the smartest money on Wall Street is buying and selling. Philippe Laffont is a billionaire investor best known for founding the hedge fund Coatue Management. Today, Coatue boasts roughly $27 billion in assets under management (AUM) across 81 different stocks.
According to Coatue's most recent 13F, the fund trimmed its exposure in Nvidia by 26% during the third quarter. At the same time, the firm scooped up 1,488,666 shares of AI networking and security specialist Broadcom (NASDAQ: AVGO) -- increasing its position by 52%.
Let's dig into Broadcom's position in the chip landscape and assess whether now is a good time to follow Coatue's move.
Broadcom has a unique position in the chip realm
AI workloads require immense amounts of training and inferencing data moving across graphics processing units (GPUs), central processing units (CPUs), and memory and storage devices. At its core, Broadcom specializes in data center connectivity solutions that offer high-speed, low-latency connections across these various pieces of infrastructure.
For the company's fiscal third quarter (ended Aug. 4), Broadcom reported $7.3 billion of revenue in its semiconductor solutions business. While this segment comprises more than half of Broadcom's total revenue base, sales in this division only grew 5% year over year.
Although this level of growth may appear mundane, I see some trends that suggest that Broadcom's future looks bright. For example, within the semiconductor segment, sales from AI accelerators more than tripled during the third quarter. Meanwhile, the company's Ethernet switchers -- dubbed Tomahawk 5 and Jericho3-AI -- grew by more than fourfold year over year.
Given these underlying metrics buried underneath the broader semiconductor business unit as a whole, I'm cautiously optimistic that Broadcom is about to enter a new phase of growth underscored by accelerating demand for its networking chips and connectivity switches.
Image source: Getty Images.
The long-term narrative looks bright
Dan Ives of Wedbush Securities is one of the most closely followed equity research technology analysts on Wall Street. Recently, Ives suggested that more than $1 trillion will be spent on AI-driven infrastructure over the next three years. In other words, investment in data centers, chips, GPUs, CPUs, and connectivity solutions is expected to rise considerably as companies double down on their AI roadmaps.
During Broadcom's third-quarter earnings, CEO Hock Tan alluded that much of the growth from Ethernet and AI accelerators stemmed from big tech, as "hyperscale customers continue to scale up and scale out their AI clusters."
These are good signs for Broadcom, and I'm optimistic about the company's ability to capture incremental market share as AI infrastructure becomes more of a priority in the AI narrative as a whole.
Taking a look at Broadcom's valuation
So far in 2024, shares of Broadcom have gained 45% -- handily outperforming both the S&P 500 and Nasdaq. Yet despite this strong performance, Broadcom's valuation has normalized a bit in recent months.
AVGO PE Ratio (Forward) data by YCharts.
At a forward price to earnings (P/E) of 26.2, Broadcom is trading at a much more reasonable valuation compared to Nvidia -- which boasts a forward P/E of 32. On the surface, Nvidia's premium over Broadcom may appear warranted. The company is growing at a much faster rate, and demand for its GPUs and data center solutions doesn't appear to be slowing down at all.
However, as I mentioned above, secular tailwinds suggest that investment across the entirety of the AI infrastructure spectrum should rise considerably over the next few years. Looked at another way, rising demand for Nvidia's chipsets should serve as a catalyst for Broadcom's ecosystem of network connectivity solutions.
In my eyes, the market may be discounting Broadcom's potential to benefit from these demand trends. For that reason, I think the stock is an absolute steal right now. I see Broadcom as an under-the-radar opportunity among AI semiconductor stocks, and think the stock is a great option for long-term investors.
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Adam Spatacco has positions in Nvidia. The Motley Fool has positions in and recommends Nvidia. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
