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Broadcom (NASDAQ: AVGO) is one AI stock outperforming Nvidia right now. This year, it has risen about 45% – almost twice the gain of its rival.
Is this one I should buy for my Stocks and Shares ISA? Let’s take a look at the numbers.
A chip and networking powerhouse
Before we get into the financials, it’s worth providing a bit of background information on this business. Because it’s not as well known as Nvidia and other popular AI stocks.
A $1.6trn market cap technology business, Broadcom operates in two main areas. These are semiconductor solutions and infrastructure software.
In the semiconductor solutions segment, it makes chips for a range of industries. Where it’s having success right now, however, is custom AI chips (XPUs) for large technology companies.
Currently, it has four customers paying (a lot) for these custom chips. We don’t know who the most recent customer is (it may be OpenAI) but the others are believed to be Alphabet, Meta, and Bytedance.
The infrastructure software segment focuses on providing solutions for managing complex IT environments. This area of the business has grown significantly through acquisitions, including that of VMware, which was recently bought for around $70bn.
Strong momentum
Now, this company has significant momentum at the moment. Last week, it posted its earnings for the third quarter of fiscal 2025 and the numbers were impressive.
For the quarter, revenue was $15.95bn while net income was $8.4bn. These figures were up 22% and 37% year on year, respectively.
Zooming in on AI revenue, this was up 63% to $5.2bn. So clearly, the company is seeing high demand for its custom AI chips.
Looking ahead, management advised that it expects AI revenue to climb to $6.2bn this quarter. Meanwhile, next fiscal year, it expects it to grow by more than 60% thanks to high levels of spending by the four customers.
It’s worth pointing out that on the earnings call, CEO Hock Tan said he believes that in the future, XPU share at its large AI customers could be bigger than GPU share. In other words, the demand for custom chips may eventually outstrip the demand for general-purpose AI GPUs designed by the likes of Nvidia and AMD.
Note that after the earnings, a ton of analysts hiked their price targets for the stock. Loads of them have gone to $400, which is nearly 20% above the current share price.
High valuation
So, this is all very exciting. But what about the valuation?
Well I’d expect the earnings forecast to rise in the weeks ahead on the back of the company’s strong earnings and guidance. But right now, analysts expect earnings per share of $8.73 next financial year (beginning November).
That puts the stock on a forward-looking price-to-earnings (P/E) ratio of 38. That’s quite a high valuation (for reference, Nvidia trades at 26).
It’s not insanely high. But there’s some customer concentration risk here and if one of Broadcom’s customers decided to pull back on spending and earnings are disappointing, the stock could underperform given its high multiple.
My move now
Given the high valuation, I’m going to keep this stock on my watchlist for now.
I’m keen to get it into my portfolio at some stage as it’s clearly a major player in AI. I think I’ll have better buying opportunities in the months ahead, however.
