Artificial intelligence (AI) has been a red-hot investment theme over the past two years, with its ability to learn and improve without much human input, making it valuable across nearly every industry. PwC predicts that AI could boost the global economy by $15.7 trillion by 2030.
With AI adoption on the rise, chip stocks like NVIDIA Corporation (NVDA) and Broadcom Inc. (AVGO) are well-positioned for long-term growth. But with these stocks hovering near their 52-week highs, is now the right time to buy, or should you wait for a potential dip? Let’s find out.
Stock to Buy: NVIDIA Corporation (NVDA)
Nvidia has been one of the most talked-about stocks this year, and for good reason. As one of the hottest large-cap stocks this year, the Wall Street darling is up nearly 14% in just the past week and more than 190% over the past year. It is trading just 5.6% below its 52-week high of $140.76. Much of this excitement is fueled by the company’s new Blackwell platform, which has both investors and customers eagerly watching its next moves.
Several analysts remain bullish on NVDA, and it’s easy to see why. KeyBanc recently raised its fiscal 2025 sales forecast to $130.60 billion, driven in part by Nvidia’s new AI chips, which are expected to contribute around $7 billion to fourth-quarter revenues.
Additionally, the company’s collaboration with Foxconn to build Taiwan’s largest supercomputer, along with a massive manufacturing facility in Mexico, underscores Nvidia’s commitment to scaling its operations while also minimizing supply chain risks.
In the second quarter that ended July 28, 2024, Nvidia’s revenue increased 122% year-over-year to $30.04 billion, and 15% from the first quarter. This robust growth exceeded analysts’ expectations, who had forecasted around $28.75 billion. Its AI-driven Data Center Group generated $26.30 billion in revenue, resulting in a 16% sequential gain and a triple-digit growth of 154% over the same period last year.
On the bottom line, its operating income surged 174% from the year-ago value to $18.64 billion. NVDA’s non-GAAP net income amounted to $16.95 billion or $0.68 per share, compared to $6.74 billion or $0.27 per share in the previous year’s quarter, respectively. The chipmaker is now gearing up for new AI hardware releases based on the Blackwell architecture, which could boost demand in the coming years.
Moreover, it forecasted a revenue of $32.50 billion, plus or minus 2%, for its fiscal third quarter, representing an 81.6% growth from the year-ago quarter. However, this slightly falls short of the analysts’ estimates of $32.90 billion. Nvidia’s business continues to thrive and will likely report another blowout quarter next month.
In addition to its strong financials, the company has approved a massive $50 billion share buyback program, which could boost investor returns over time. This, combined with surging demand for AI platforms and upcoming product launches, makes NVDA a stock worth considering for long-term investors looking to buy on any significant dip.
Stock to Hold: Broadcom Inc. (AVGO)
Thanks to the escalating demand for its AI products, Broadcom delivered a better-than-expected earnings report with double-digit top-line growth, comfortably surpassing Wall Street’s estimates. The demand for AVGO’s products, essential for building Data Centers, has soared due to the extensive adoption of AI-powered applications, particularly within the enterprise sector.
The semiconductor division, which makes up 56% of its total revenue, has been the company’s primary growth driver, while the remaining 44% falls into the industrial software segment. To keep pace with the surge in demand for AI technology, Broadcom is investing heavily in its product lineup, aiming to solidify its foothold in the booming AI chip market.
This frenzy for AI chips, driven by hefty investments in AI models, has significantly boosted the company’s topline growth. For the third quarter that ended on August 4, 2024, AVGO’s net revenue increased 47% year-over-year to $13.07 billion, with triple-digit revenue growth in the Infrastructure Software segment to $5.79 billion. Its revenues came in slightly above the analysts’ estimate of $12.96 billion.
AVGO’s gross margin grew 7.5% from the year-ago value to $8.36 billion, while its non-GAAP operating income came in at $7.95 billion, up 11.2% year-over-year. On top of it, the company’s non-GAAP net income came in at $6.12 billion or $1.24 per share, up 33.2% and 18.1% year-over-year, respectively. Also, its adjusted EBITDA increased 41.7% from the prior year’s quarter to $8.22 billion.
Looking ahead, management anticipates the revenue for the fourth quarter to be around $14 billion (in line with analysts’ consensus estimates) and adjusted EBITDA to be approximately 64% of revenue, translating to about $9 billion. For the full year, Broadcom projects revenue of $51.50 billion, up from its previous forecast of $51 billion.
Moreover, its robust free cash flow of $4.79 billion enabled it to pay a quarterly dividend of $0.53 per share on September 19, 2024. With 13 consecutive years of dividend growth, AVGO stands out among semiconductor-focused enterprises due to its consistent and significant cash flow distributions to shareholders.
The company pays an annual dividend of $2.12 per share, yielding 1.21% on the current share price, with a four-year dividend yield of 2.50%. Over the past three and five years, its dividend payouts have grown at CAGRs of 13.5% and 14.7%, respectively.
When it comes to price performance, shares of AVGO have soared over 110% over the past year and returned nearly 62% year-to-date. The stock is trading just 2.4% below its 52-week high of $185.16. With accelerating revenue, robust profit margins, and significant exposure to the AI chip industry, AVGO has garnered immense investor interest. However, the stock’s current valuation might burn a hole in one’s pocket.
In terms of forward non-GAAP P/E, AVGO is trading at 36.11x, 50.8% higher than the industry average of 23.94x. Its forward EV/EBITDA and Price/Cash Flow of 27.77x and 37.69x are 92.6% and 66.7% higher than the respective industry averages of 14.42x and 22.61x. Furthermore, the stock’s forward Price/Sales multiple of 15.85 compares with the industry average of 2.85.
Hence, given the lofty valuation levels, it may be prudent for investors to await a more opportune entry point into the stock.
