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Nvidia shares fell another 4.3% Thursday (12 November), as the CEO scandal continues to cause investors to rethink what the leadership uncertainty will mean for the company. Thinking ahead, there’s a growth share in the semiconductor space that I think could do well from all of this.
An opportunity from Nvidia’s troubles
I’m referring to Broadcom (NASDAQ:AVGO). It’s up 7% in the past year but, interestingly, it’s up 17% in just the past week, as the Nvidia saga’s played out. This automatically tells me that investors aren’t seeing the Nvidia news as bad for Broadcom, but rather as helping it out.
When I think it through, this makes sense. Even though Nvidia has dominated the AI chip market for several years, major technology companies have become increasingly interested in developing their own specialised AI processors.
This is where Broadcom comes in. Rather than competing exclusively through general-purpose GPUs, Broadcom works with technology giants to design custom accelerators tailored to their specific computing requirements. These chips can potentially offer better efficiency and lower costs for particular workloads. This makes them attractive to companies operating enormous AI data centres.
Based on the events and share price moves this week, I think the uncertainty surrounding Nvidia’s leadership could accelerate this trend.
After all, businesses spending tens of billions of dollars on AI infrastructure have good reasons to avoid depending entirely on one supplier. Especially one that doesn’t have a CEO right now! Even a relatively small shift in spending could provide a significant boost to Broadcom’s earnings.
Growth even with no changes
What particularly attracts me to Broadcom is that its financial performance already supports the investment case. In its fiscal third quarter, revenue jumped 86% year-on-year to around $29.6bn.
Even more impressively, AI semiconductor revenue surged 221% to $16.7bn. These figures demonstrate just how quickly demand for the company’s products is expanding.
Management also expects AI semiconductor revenue to reach around $21.7bn in the fourth quarter, representing another substantial increase. This doesn’t factor in any shift in spending from clients based on the Nvidia news this week.
Looking further ahead, Broadcom’s indicated that annual AI chip revenue could reach around $115bn in fiscal 2027. The sector’s very fluid, so it’s key for any company in this sector to have the cash to pursue new projects. That doesn’t seem to be a problem for Broadcom as it generated $13.7bn in free cash flow during its latest quarter. This provides financial flexibility to invest in future products.
Exposure to the AI trade
The biggest risk I see is that this adds exposure to the general AI theme. For those who think we’re in a bubble, I get why they might not be keen to add more stocks from this area.
The other angle’s more company-specific. Like many companies in the AI space, its valuation already reflects considerable optimism surrounding AI spending. Any slowdown in customer investment could therefore trigger a sharp share price correction.
There’s also the possibility that Nvidia’s leadership uncertainty proves temporary, with customers continuing to favour its established technology.
I get that these concerns are real. But on balance, I’m seriously thinking about allocating some funds to Broadcom as I don’t think the AI story has finished yet.
Should you invest £5,000 in Broadcom right now?
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Jon Smith has no positions in the shares mentioned.
This story originally appeared on Motley Fool
