Why Broadcom Inc. (AVGO) Has an Edge Over Nvidia According to an Analyst

In our previous article, we presented a list of 10 AI stocks that analysts are talking about this month. In this article, we will take a closer look at where Broadcom Inc (NASDAQ:AVGO) stands against other AI stocks on investors’ radar in January 2025.

The AI Growth Story is Still Intact

Drew Pettit, U.S. equity strategist at Citi Research, recently appeared on CNBC and shared his insights on the AI growth story for 2025. He believes that the fundamental stories of pick-and-shovel names will continue to drive growth, but the trade will broaden out into users of AI, such as car companies with autonomous driving capabilities or software companies incorporating AI into their programs.

Why Hedge Funds Matter

We have picked 10 AI stocks that analysts are talking about this month and included the number of hedge fund investors in each company. Why do we focus on these top stock picks? Our research has shown that imitating the best hedge funds can outperform the market by a significant margin. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points.

Broadcom Inc (AVGO) – A Leader in AI Chips

Broadcom Inc. (NASDAQ:AVGO)

Number of Hedge Fund Investors: 128
King Lip, BakerAvenue Wealth Management chief strategist, recently talked to CNBC and explained his bull case for Broadcom Inc. (NASDAQ:AVGO):

"I think Broadcom Inc. (NASDAQ:AVGO) is an interesting name just because it does something that Nvidia doesn’t do, which is custom AI chips for their customers. This segment is growing just as fast as Nvidia is, and the company itself actually has a lower multiple than Nvidia."

Broadcom Inc. (NASDAQ:AVGO) continues to be a leader in the AI ASCI and networking chips market. The company has 3nm AI ASIC chip deals with Alphabet and Meta, among other tech giants aiming massive spending for AI hyperscaling.

Challenges Ahead

However, the stock could face the impact of what Nvidia is facing today: too high expectations. In the latest quarterly results, Broadcom Inc (NASDAQ:AVGO) revenue was largely in line with estimates. The company has narrowly exceeded revenue expectations by less than 5% in most cases. Some analysts suggest Broadcom’s growth rates will moderate to below 20% CAGR starting the first quarter of 2025. In fiscal Q4, it was +50% topline growth. The market won’t be kind to the stock when the revenue growth rate slows.

Columbia Threadneedle’s Take

Columbia Threadneedle Global Technology Growth Strategy stated the following regarding Broadcom Inc. (NASDAQ:AVGO) in its Q3 2024 investor letter:

"Similar to the earnings results for Nvidia, shares of Broadcom Inc.(NASDAQ:AVGO) initially sold off after the company reported solid earnings that fell light of elevated market expectations, but the stock did recover from its drawdown in the matter of a few weeks. With an enticing combination of custom chip offerings as well as networking assets, Broadcom remains one of the best positioned companies as part of the AI revolution."

Broadcom’s Dominant Position

The company outlined a path to derive a majority of its revenue from the AI end market within a couple of years, and the non-AI part of the business has stabilized after a deep correction. The company’s dominant market position in its end markets, along with durable growth, strong margins, and best-in-class capital allocation, presents an opportunity to compound capital over time.

Ranking 7th on Our List

Overall, AVGO ranks 7th on our list of AI stocks on investors’ radar in January 2025. While we acknowledge the potential of AVGO, our conviction lies in the belief that under-the-radar AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame.

The Cheapest AI Stock

If you are looking for an AI stock that is more promising than AVGO but trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

Conclusion

In conclusion, Broadcom Inc (NASDAQ:AVGO) is a leader in AI chips with significant growth potential. However, the company faces challenges ahead, including moderating revenue growth rates and competition from other tech giants. Our conviction lies in the belief that under-the-radar AI stocks hold greater promise for delivering higher returns within a shorter time frame.