Best Artificial Intelligence (AI) Stock Split: Nvidia, Broadcom or Lam Research? | The motley fool

As the artificial intelligence revolution is in full swing, the stock prices of the most sought-after semiconductor companies are on the rise. In late May, I identified five AI stocks that were due for a stock split.

And there you have it, three of them have already announced their separation: Nvidia (NVDA -6.68%), Broadcom (AVGO -3.70%)And Lam Search (LRCX -2.47%)Nvidia having already executed its 10-for-1 split on June 7. Broadcom will split its shares 10-for-1 on July 15 and Lam will execute his split on October 3.

Although retail investors and employees can more easily buy shares at a lower price, a stock split does not change the fundamentals or overall value of the company. It’s like cutting a pizza into smaller slices: you always have the same amount of pizza!

But after their post-split pushes, which AI winner is the better buy now?

How Nvidia, Broadcom and Lam Research benefit from AI

Nvidia has been the clear winner of the AI ​​revolution, with market-leading GPUs and CUDA software that allows GPUs to be programmed for data processing. As a pioneer, Nvidia has until now held a near-monopoly on the chips needed to train large language models.

Broadcom is a leader in Ethernet networking chips that enable systems to exchange huge amounts of data between memory and processors in and around data centers. Additionally, its custom IP ASIC (application-specific integrated chip) business helps large cloud computing companies build their own in-house AI accelerators. Needless to say, both of these businesses are booming.

And Lam Research is a key manufacturer of semiconductor equipment that dominates parts of the etching and deposition process, enabling the production of Nvidia and Broadcom chips, as well as many others.

Assessment

All three stocks have surged over the past 18 months as the semiconductor slowdown of 2022 has given way to the AI ​​enthusiasm of 2023. Although none of their stocks are “cheap » for the moment, there are nevertheless notable differences in valuations.

Data source: Yahoo! Finance

Nvidia has the highest forward P/E ratio, but also the highest expected growth rate and the lowest PEG ratio, as defined by forward P/E divided by expected earnings growth rate over the next five years.

So, one could actually argue that despite Nvidia’s astonishing recent run, it’s still the cheapest of the three AI stock split stocks.

But investors may want to be careful

Of course, we must not forget that a PEG ratio is based on the expected growth rate over several years and is therefore subject to many uncertainties. After all, before the introduction of ChatGPT and the resulting AI craze, how many would have anticipated a growth rate approaching 50% for Nvidia over five years?

At the same time, an expected growth rate does not take into account the degree of risk or uncertainty of that forecast. If something were to go wrong with the current AI spending boom or with Nvidia’s competitive moat, its growth rate in a few years might not match those lofty expectations.

In terms of AI spending, we are, by most accounts, still in the early stages of the revolution. But if companies fail to get a return on all that spending, investments in AI could slow down. Although many organizations report great benefits from AI, not all AI projects work. For example, McDonald’sjust ended its Drive Thru AI experiment and is rehiring humans, at least for now.

Additionally, Nvidia’s net margins jumped to 58.5% last quarter, an outrageous number for a chipmaker. With such high profits, one can be sure that Nvidia will experience intense competition for AI chips in the future, not only from its major semiconductor trading competitors, but also from all cloud companies computing who are also now building their own custom accelerators to reduce costs.

If investment in AI slows or significant competition begins to eat away at Nvidia’s growth or margins, its projected earnings growth may not live up to the current five-year forecast.

Broadcom and Lam Research could surprise on the upside

While Nvidia is currently experiencing strong AI-driven growth, Broadcom and Lam Research are expected to experience a wave of growth in the future. Investment in networks typically comes after purchasing the chips, which benefits Broadcom, and as chipmakers begin to invest in new capacity, they buy more production machines, which benefits Lam .

Meanwhile, Broadcom and Lam Research have more diversified businesses and larger service segments, which mitigates some risks.

Interestingly, these non-AI companies are currently emerging from a recession. For Broadcom, its broadband and storage controller businesses reported declines of 39% and 27%, respectively, last quarter. But management believes that these segments have reached their lowest level. Meanwhile, Lam Research’s biggest business was once NAND flash storage, which experienced its biggest downturn on record and has yet to recover.

Lam has done a great job gaining market share in foundry and logic chip production to counter the slowdown in NAND flash, and Broadcom has moved away from cyclical chip markets in general to focus on software, with its recent massive acquisition of VMware looking like a home run. .

Broadcom and Lam also have much of their business that is less volatile than chipmaking. Broadcom’s software division now represents 42% of its revenue following the acquisition of VMware. Meanwhile, Lam’s spare parts and services business, a less volatile business largely tied to its installed base, accounted for 37% of last quarter’s revenue. Although Nvidia is also developing software offerings today, this represents only a small percentage of its sales, as the vast majority of its revenue still comes from the sale of AI chips.

After a big race, play it safe

Broadcom and Lam Research both operate in oligopolies, with Broadcom effectively having only one primary competitor in accelerator ASICs and networking chips, while Lam tends to compete with only one or two burn and deposit competitors , depending on the manufacturing stage.

Nvidia appears to be a monopoly today, but will see the most competitive threats in the future, not only from rival merchant chip companies, but also from cloud companies that make their own AI accelerators in-house.

Thus, the preference today should go to the relative safety of Broadcom or Lam. Both companies have more diversified businesses, a higher percentage of profits coming from software/services, and cheaper valuations with lower expectations. Additionally, Broadcom and Lam stand to benefit from AI growth regardless of which chipmaker dominates the future of the sector, while Nvidia will have to defend against a myriad of competitors over the next five years.