Optimized Artificial Intelligence (AI) Shares: Broadcom versus Marvell Technology
Semiconductor stocks Broadcom (AVGO 1.13%) and Marvell Technology (MRVL 2.56%) have seen significant gains in 2024, with both companies' shares more than doubling thanks to the surging demand for their application-specific integrated circuits (ASICs) and networking chips. These components are being widely used in data centers to handle artificial intelligence (AI) workloads.
Broadcom's stock price has soared by 124% this year, while Marvell's shares have increased by 93%. With both stocks performing well, the question arises: which one should you insert into your portfolio at this moment, given their impressive gains in 2024? Let's delve into the reasons.
The case for Broadcom
The need for AI-specific ASICs is expanding as cloud service providers aim to develop in-house chips to lessen their dependence on expensive semiconductors from suppliers like Nvidia. This is where Broadcom enters the picture. It is reportedly manufacturing custom chips for major clients such as Google (owned by Alphabet), TikTok owner ByteDance, and Meta Platforms.
This large customer base enables Broadcom to fully exploit the rapidly growing custom AI processor market. The company recorded revenue of $12.2 billion from its custom AI chip and networking processor sales in fiscal 2024 (ending on Nov. 3). That's a substantial leap of 220% from the $3.8 billion in revenue it generated from AI chips in fiscal 2023.
Moreover, Broadcom forecasts its AI-related addressable market to reach a range of $60 billion to $90 billion by fiscal 2027. During its latest earnings conference call, executives highlighted that the company is "well-positioned to claim a leading market share in this opportunity and anticipate this will stimulate a strong ramp from our 2024 AI revenue base of $12.2 billion."
A significant factor working in Broadcom's favor is its robust position in the ASIC market. J.P. Morgan estimates that Broadcom holds between 55% and 60% of the custom chip market. If it retains or even increases this market share and captures half of that space, its annual AI revenue could fall between $30 billion and $45 billion (based on Broadcom's estimated size of the custom AI chip market).
Therefore, Broadcom's AI revenue has the potential to increase by a factor of 2.5 to 4 in the next three years. This explains why analysts have revised their expectations for the current and next two fiscal years.
The graph below indicates a notable uptick in Broadcom's revenue considering it ended fiscal 2024 with organic revenue growth of 9% (excluding the acquisition of VMware, which was completed in November 2023).
Broadcom closed fiscal 2024 with consolidated revenue of $51.6 billion. The graph above suggests that its revenue will grow at healthy double-digit rates over the next three years.
Given its share of the lucrative custom AI chip market, it's highly probable that Broadcom will continue to be a prominent AI stock.
The case for Marvell Technology
Marvell is viewed as the second-largest player in the ASIC market, with an estimated 13% to 15% market share. However, the chipmaker has been gaining traction and is reportedly manufacturing custom AI chips for major clients like Alphabet, Microsoft, and Amazon.
The demand for Marvell's custom AI processors seems robust. The company's data center revenue for the third quarter of fiscal 2025 (ending on Nov. 2) increased by 98% compared to the same period last year, reaching $1.1 billion. This substantial growth compensated for the weaker performance in other business segments, leading to an overall revenue increase of 7% year over year to $1.52 billion.
However, the outlook for the current quarter indicates a notable improvement. Marvell's revenue forecast for the current quarter of $1.8 billion indicates a year-over-year increase of 26%. This significant improvement from the previous quarter is expected to continue in the following fiscal year.
This rapid improvement in financial performance can be attributed to the faster-than-anticipated growth in Marvell's AI business. The company initially projected $1.5 billion in AI revenue for the current fiscal year, but now expects to significantly surpass its full-year target. This is due to a more robust-than-expected surge in the demand for its custom AI chips.
Importantly, Marvell anticipates its AI revenue will hit $2.5 billion in the next fiscal year, but it's possible that it will surpass this mark since Amazon and others have expanded their collaboration with the chipmaker.
Management states that it has "secured supply chain capacity to support our customers' growth forecast," suggesting that it may be able to achieve even faster growth by fulfilling additional demand.
Ultimately, the strength of Marvell's AI business is so robust that its top line is anticipated to increase by 41% in the next fiscal year to $8.11 billion, following an improvement of just 4% in the current year to $5.75 billion. Analysts expect Marvell's growth trajectory to continue beyond the next fiscal year as well.
The substantial upward trend in Marvell's revenue explains why analysts predict a significant boost in its profits over the upcoming couple of fiscal years, with a minor increase of only 3% in the current financial year to $1.56 per share.
Despite Marvell's potential to continue as a leading AI stock, the question remains if it's a more appealing investment than Broadcom.
The conclusion
In light of the analysis, both Marvell and Broadcom show strong growth prospects. However, Marvell is projected to achieve this growth at a quicker pace, as previously depicted in the graphs. This speedy growth can be linked to the company's relatively smaller size and potential expansion in the custom AI chip market.
This accelerated growth for Marvell comes at a premium valuation compared to Broadcom.
Investors seeking an AI stock that can deliver growth at a faster pace might find Marvell an attractive option, despite its higher price tag compared to Broadcom. Conversely, Broadcom's prominent position and substantial market potential in AI chips ensure that investors won't likely falter with this choice if they're looking for a comparatively more affordable option.
After considering the robust growth of both Broadcom and Marvell Technology in the AI chip market, the conversation naturally shifts towards financial planning and investment strategies. If you're looking for a potential high-growth investment, Marvell's accelerated expansion in the custom AI chip market might be appealing, despite its higher valuation compared to Broadcom. On the other hand, Broadcom's substantial market share and strong financial performance offer a more affordable investment option in the lucrative AI stock market. It's crucial to consider your individual investment goals, risk tolerance, and time horizon before making a decision. Proper research and consultation with a financial advisor can help guide your investment choices effectively. [Money, Finance, Investing]
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