Buy Broadcom Stock as Q1 Results Approach or Choose Nvidia Instead?

Investors may be up in the air on whether to buy, hold, or sell Broadcom AVGO stock as results for its fiscal first quarter approach after-market hours on Wednesday, March 4.

The tech giant is likely to issue a strong Q1 report thanks to demand for its custom AI chips. On the other hand, heightened geopolitical tensions are weighing on broader market sentiment, and Nvidia NVDA was able to post blowout quarterly results last week but has still seen its stock fall due to AI sustainability concerns.

Pros & Cons of the AI Chip Hype

Althogh the leading chipmakers are seeing unprecendedted expansion, the biggest fear is that their hyperscale clients won’t be able to keep up their immense AI spending as they are potentially getting ahead of what they will ultimately monetize from it.

Alphabet GOOGL, for example, plans to nearly double its CapEx to $175-$185 billion in 2026, much of which flows into Broadcom’s custom TPU (tensor processing units) chips and AI networking.

While massive AI spend is driving explosive growth for Broadcom and Nvidia, investors are starting to question how long the great times will last, given that their stellar expansion is centered on a small number of customers in a rapidly growing but uneven AI infrastructure market.

The overlap may also be concerning, as Broadcom and Nvidia serve many of the same hyperscalers, including Alphabet, Amazon AMZN, and Microsoft MSFT.

Nvidia mainly builds GPUs (graphics processing units) — versatile processors optimized for training and inference across many AI workloads. In contrast, Broadcom focuses on networking silicon and custom ASICs (application-specific integrated circuits). These chips are purpose-built for specific AI tasks and can be more efficient than GPUs for targeted workloads.

Broadcom’s Q1 Expectations

Attributed to AI-driven revenue, Broadcom’s Q1 sales are thought to have increased 29% to $19.27 billion from $14.92 billion a year ago. On the bottom line, Q1 EPS is expected to be up 27% to $2.03 from $1.60 per share in the prior year quarter.

Notably, Broadcom has exceeded the Zacks EPS consensus for a remarkable 19 consecutive quarters with an average earnings surprise of 3.35% in its last four quarterly reports.

Recent Performance & P/E Comparison

Serving as a viable core holding in a portfolio, Broadcom stock is up more than 120% in the last two years, which has edged Nvidia and vastly outperformed the broader index's returns of just under 40%.

However, Broadcom stock is trading at a more noticeable premium to the broader market at 31X forward earnings, with Nvidia being intriguingly near the benchmark S&P 500’s 22X.

Summary & Strategic Thoughts

Going into its Q1 report, Broadcom stock lands a Zacks Rank #3 (Hold). The tech giant has a unique niche as it relates to AI chips and silicon networking, which certainly makes it worth holding AVGO in the portfolio. That said, there could be better buying opportunities ahead, and more attractive AI chip exposure options at the moment as well.

To that point, Nvidia stock currently sports a Zacks Rank #2 (Buy), sharing many of the same hyperscale customers but having a broader reach in the AI ecosystem while being more attractively valued. It’s also becoming harder to say that Broadcom and Nvidia won’t have an adverse effect on each other because they draw the majority of their revenue from the same small group of hyperscalers.  

What Broadcom does have working in its favor, especially in the long-haul, is that hyperscalers are trying to reduce dependence on Nvidia, although this creates a feedback loop where gains for one can directly pressure the other.

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This article originally published on Zacks Investment Research (zacks.com).

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