Best Artificial Intelligence (AI) Stock with Stock-Split: Nvidia, Broadcom or Lam Research?

With the AI ​​revolution in full swing, stock prices of favored semiconductor stocks have been on the rise. In late May, I identified five AI stocks that needed to be split.

Lo and behold, three have already announced splits since then: Nvidia (NVDA -6.68%), Broadcom (AVGO -3.70%)AND Lam Research (LRCX -2.47%)with Nvidia already executing its 10-for-1 split on June 7. Broadcom will split its shares 10-for-1 on July 15, and Lam will execute her split on October 3.

While retail investors and employees may be more easily able to buy shares of a stock at a lower price, a stock split does not change the fundamentals or overall value of the business. It’s like cutting a pizza into smaller slices: You still have the same amount of pizza!

But after their post-split gains, which AI winner is the best to buy now?

How Nvidia, Broadcom and Lam Research benefit from AI

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

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

And Lam Research is a leading semiconductor device manufacturer that dominates several steps of the etching and deposition process, enabling the production of Nvidia and Broadcom chips, as well as many others.

ASSESSMENT

All three of their stocks have rallied over the past 18 months as the 2022 semiconductor crash gave way to the 2023 AI boom. While none of their stocks are “cheap” at the moment, there are some differences visible in the assessment.

Data source: Yahoo! finances

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

So it could actually be argued that despite Nvidia’s stunning recent performance, it’s still the cheapest of the three AI stocks.

But investors may want to be cautious

Of course, it should be remembered that a PEG ratio is based on the expected growth rate over a number of years, and thus is subject to a lot of uncertainty. After all, before the introduction of ChatGPT and the AI ​​craze that followed, how many would have predicted a nearly 50% growth rate for Nvidia over five years?

Meanwhile, an expected growth rate does not factor in how risky or uncertain that forecast might be. If anything goes wrong with the current boom in AI spending or Nvidia’s competitive gap, its growth rate in a few years may not match these lofty expectations.

In terms of AI spending, we are by most accounts still at the beginning of the revolution. But if companies don’t find they’re getting a return on all that spending, AI investment could slow. While many organizations are reporting strong benefits from AI, not all AI projects are working. For example, mcdonald’sIt has just folded the AI ​​during the experiment and is hiring humans again, at least for now.

Image source: Getty Images.

Additionally, Nvidia’s net margins rose to 58.5% last quarter, a wild number for a chip company. With profits this high, it can be sure that Nvidia will see intense competition for AI chips going forward, not just from its main commercial semiconductor competitors, but any cloud companies that are also now building their own accelerators. customized to save costs.

If investment in AI slows or significant competition begins to affect Nvidia’s growth or margins, its projected earnings growth may not be in line with the current five-year forecast.

Broadcom and Lam Research may surprise until the end

While Nvidia is seeing a lot of AI-powered growth right now, Broadcom and Lam Research should see a wave of growth going forward. Investment in the network usually comes after the chips are bought, benefiting Broadcom, and as chipmakers start investing in new capacity, they will buy more production machines, benefiting Lam.

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

Interestingly, those non-AI businesses are coming out of a slump now. For Broadcom, its broadband controller and storage businesses reported 39% and 27% declines, respectively, last quarter. But management said it believes these segments have bottomed out. Meanwhile, Lam Research’s biggest business was once NAND flash storage, which saw its biggest drop ever and has yet to recover.

Lam has done a great job of gaining market share in foundry and logic chip manufacturing to counter the decline of NAND flash, and Broadcom has moved away from cyclical chip markets in general to focus on software, with the acquisition of his latest massive VMware that looks like a work at home. .

Both Broadcom and Lam also have large parts of their businesses that are less volatile than chipmaking. Broadcom’s software division now accounts for 42% of its revenue after the VMware acquisition. Meanwhile, Lam’s spares and services business, a less volatile business largely tied to its installed base, accounted for 37% of revenue last quarter. While Nvidia is also developing software offerings today, that’s only a low single-digit percentage of its sales, as it still gets the vast majority of its revenue from sales of AI chips.

After a big run, play it safe

Broadcom and Lam Research both operate in oligopolies, with Broadcom effectively having only one major competitor in ASIC accelerators and network chips, while Lam tends to compete with only one or two etch and deposition competitors, depending on the manufacturing step .

Nvidia appears to be a monopoly today, but will see more competitive threats going forward, not only from rival commercial chip companies, but also from cloud companies that manufacture their own AI accelerators in-house.

Thus, the preference today should be for the relative safety of either Broadcom or Lam. Both companies have more diversified businesses, a higher percentage of earnings coming from software/services, and cheaper valuations with lower expectations. Additionally, Broadcom and Lam should benefit from the rise of artificial intelligence regardless of which chip maker dominates the future of the industry, while Nvidia will have to fend off a host of competitors coming at it over the next five years.