An investment of $5,000 made in shares of Nvidia 10 years ago would now be worth more than $1.2 million. A big chunk of those gains have arrived since the beginning of 2023 once the company’s business took off remarkably thanks to the red-hot demand for its artificial intelligence (AI)-focused graphics cards.
There is a good chance that Nvidia’s stunning stock market rally could continue thanks to the company’s dominant position in the market for AI chips, as well as additional catalysts in the form of gaming, automotive, and digital twins. However, savvy investors may be looking for options other than Nvidia to capitalize on the AI boom.
That won’t be surprising as Nvidia has already delivered massive gains in the past year and a half, and there are concerns among certain analysts about its ability to sustain its terrific growth. Of course, finding a company that could deliver Nvidia-like gains and turn investors into millionaires isn’t an easy task.
However, buying and holding solid companies for the long run could indeed help investors construct a diversified million-dollar portfolio. That’s why investors would do well to take a closer look at Advanced Micro Devices (NASDAQ: AMD) and Broadcom (NASDAQ: AVGO), two technology stocks that could deliver healthy long-term returns to investors thanks to their lucrative growth opportunities.
1. Advanced Micro Devices
AMD stock’s 8% gains this year mean that the stock is underperforming the PHLX Semiconductor Sector index, which is up 29% in 2024, but this could change soon. While Nvidia has established a monopoly-like position in the AI chip market with a market share of more than 90%, AMD is looking to make a dent in this space with its recent moves and an aggressive product roadmap.
AMD recently announced that it will be acquiring Silo AI, which it claims is the largest private AI lab in Europe, for $665 million in cash. According to AMD, Silo AI “specializes in end-to-end AI-driven solutions that help customers integrate AI quickly and easily into their products, services and operations.” The acquired company also creates open-source large language models (LLMs) in multiple languages.
With this move, AMD should be able to shore up its presence in the AI software market, a niche that’s expected to generate over $1 trillion in annual revenue in 2032. The acquisition of Silo AI will diversify AMD’s AI prospects as the company has mostly been training its sights on the hardware side of the market so far.
But now, AMD can combine its AI chip manufacturing prowess with Silo AI’s expertise in developing end-to-end AI solutions, a move that could help accelerate its growth since it will be able to tap a bigger AI opportunity. After all, the market for AI chips is expected to generate $305 billion in annual revenue in 2030, so a move into the software side of this market could substantially amplify AMD’s growth prospects.
Additionally, AMD doesn’t need to beat Nvidia in the AI chip market to significantly boost its revenue in the long run. AMD has an additional catalyst in AI personal computers (PCs) — a market that’s already driving robust growth in one of the chipmaker’s key business segments — so the possibility of AMD outpacing Wall Street’s growth expectations cannot be ruled out.
Investors looking for an alternative to Nvidia should consider taking a closer look at AMD, which is trading at 13 times sales, compared to Nvidia’s price-to-sales ratio of 40, especially considering that its multiple AI-related catalysts could send the stock soaring in the long run.
2. Broadcom
Broadcom has been in the news of late thanks to its stock split, which is nothing but a cosmetic move that doesn’t alter the fundamentals of a company. But a closer look at its prospects indicates it is one of the best AI chip stocks to buy right now.
That’s because Broadcom is the leader in the market for custom AI chips. Broadcom manufactures application-specific integrated circuits (ASICs) that are deployed for tackling AI workloads. That’s in contrast to Nvidia’s graphics processing units (GPUs), which are used for general-purpose computing purposes.
J.P. Morgan points out that Broadcom is the leader in the custom AI chip market, and it is sitting on a revenue opportunity worth an impressive $150 billion in this space over the next five years. Analyst Harlan Sur of J.P. Morgan estimates that Broadcom could generate $30 billion in revenue from each of its five AI chip customers over the next five years, which would translate into an annual revenue growth rate of 30% to 40% in its semiconductor revenue.
The semiconductor business produced 58% of Broadcom’s revenue at $7.2 billion in the previous quarter. The chipmaker has generated $42 billion in total revenue in the trailing 12 months. So, Broadcom’s leadership in the custom AI chip market has the ability to supercharge its growth in the long run.
At the same time, Broadcom’s networking business is also getting a boost thanks to the need for faster connectivity within data center clusters to tackle AI workloads. Sales of the chipmaker’s networking switches doubled on a year-over-year basis in the previous quarter, a trend that’s likely to continue.
According to telecommunications-focused market research provider Dell’Oro Group, the market for back-end server switches could increase to $80 billion over the next five years, which would be double the current revenue opportunity in data center switches.
All this indicates that Broadcom’s growth could accelerate substantially in the long run as the company taps the multibillion-dollar opportunities available in the custom AI semiconductor and networking markets. Analysts are forecasting the company’s earnings to increase at an annual rate of 18% a year for the next five years, but it could do better than that as it converts its end-market opportunities into revenue.
And, just like AMD, Broadcom is also cheaper than Nvidia. Broadcom has a forward earnings multiple of 28 compared to Nvidia’s reading of 48. Buying this semiconductor stock at this valuation could be a smart move as its healthy growth prospects make it an ideal candidate for investors looking to construct a diversified million-dollar portfolio.
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JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, JPMorgan Chase, and Nvidia. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
Forget Nvidia: Consider These 2 Millionaire-Maker Stocks to Buy Instead was originally published by The Motley Fool
