Artificial Intelligence: A Dominant Investment Theme on Wall Street
Artificial intelligence (AI) has been a prominent investment theme on Wall Street over the past couple of years. Given its rapid and widespread adoption, as well as its transformative nature, numerous research firms have updated their estimates regarding the AI market opportunity. According to McKinsey, AI is expected to contribute $13.6 trillion to $22.1 trillion in economic value to current global GDP by 2030. PWC also forecasts that AI will increase economic activity by $15.1 trillion by 2030.
While there is a significant variation in these estimates, most firms agree that the impact of AI on the global economy will be substantial.
Nvidia: A Major Beneficiary of the AI Trend
Nvidia (NASDAQ: NVDA) has already been one of the primary beneficiaries of this fast-evolving trend. The extensive adoption of its AI-optimized chips has driven significant growth for the company, with a notable increase in demand resulting in substantial pricing power. However, it appears that this dynamic is on the verge of changing.
Microsoft’s Comments: A Possible Threat to Nvidia
In a recent interview with the BG2Pod podcast, Microsoft (NASDAQ: MSFT) CEO Satya Nadella discussed the initial AI boom triggered by OpenAI’s launch of ChatGPT in 2022 and Microsoft’s efforts to keep pace with anticipated higher demand for AI services. When asked about Microsoft’s constraints, Nadella stated, "Power yes … I am not chip supply constrained." He was referencing the high demand for electricity to power all the data centers being built but indicated that the company is better positioned in terms of chip supply going into 2025.
Nadella’s comments have been interpreted by some as implying that Microsoft has either built a substantial inventory of Nvidia chips or found alternatives through efficiencies, partnerships, and custom-made AI chips. This development may not be positive news for Nvidia shareholders.
A Beneficiary of the Developments: Broadcom
However, there is one high-flying stock that can benefit from these developments – Broadcom (NASDAQ: AVGO). As a leading custom AI chip manufacturer and advanced networking solutions provider, Broadcom has posted a record revenue of $51.6 billion in fiscal 2024, representing a year-over-year increase of 44%. AI revenue surged at an even faster pace of 220% year over year to $12.2 billion in fiscal 2024.
Growing Demand for Broadcom’s Networking Solutions
Hyperscalers require high-bandwidth and low-latency networking components to build large AI clusters for training and inferencing complex large language models. As a result, there is growing demand for Broadcom’s AI-optimized server storage solutions, which may open up new growth opportunities for the company in the coming years.
What Does This Mean for Broadcom Investors?
Broadcom is currently trading at about 21.1 times trailing-12-month sales, significantly higher than its historical three-year average price-to-sales (P/S) multiple of 13.04. However, considering the company’s robust growth potential, this rich valuation seems justified. Additionally, Microsoft’s chip sufficiency may prove to be a major tailwind for Broadcom in the coming years.
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Manali Pradhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Microsoft, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.