Both companies are targeting the same niche within the AI chip market.
of PHLX Semiconductor Division The semiconductor index is up a healthy nearly 23% so far in 2024, which isn't surprising given the robust demand for artificial intelligence (AI) chips that is driving the industry. But not all companies have benefited from this year's surge in semiconductor stocks.
for example, Broadcom (AVGO 0.38%) and Marvel Technology (MRVL -0.16%) Revenue at both companies has grown just 19% and 10%, respectively, so far this year, even as both companies see surging sales of the custom AI chips they make in-house.
But the AI-focused market these companies are in is lucrative, so it's no wonder they're stepping on the gas. So if you had to choose between these two semiconductor stocks to ride the AI wave, which one should you buy? Let's find out.
Broadcom Case Study
The market for custom AI chips sold by Broadcom and Marvell is expected to grow rapidly. Morgan StanleyBy 2027, application-specific integrated circuits (ASICs) could account for 30% of the $182 billion AI chip market, representing a potential business opportunity worth about $55 billion for Broadcom and Marvell.
What's in Broadcom's favor is that it is the leader in the ASIC market, with an estimated 35% share. J.P. MorganThis robust share explains why Broadcom expects to make $10 billion in revenue from AI chip sales this year. It's worth noting that Broadcom's AI chip revenue surged fourfold year over year to $2.3 billion in the first quarter of fiscal 2024 (ended Feb. 4).
The chipmaker reportedly already has a strong customer base in the custom AI chip market, including: Meta Platform and alphabetThanks to these customers, Broadcom's AI revenue is expected to grow at least 2.5 times compared to last year in 2024. More importantly, the growth of the custom AI chip market and Broadcom's dominant position in this niche market are expected to help the company's AI revenue soar to $16 billion in 2025 and $20 billion the following year, according to Melius Research.
The reason analysts have raised their revenue forecasts for Broadcom over the next few years is likely due to the increasing contribution of AI chips, as can be seen in the chart below.
AVGO revenue forecast data for the current fiscal year from YCharts.
But it's possible that Broadcom could surpass Wall Street's growth forecasts. Melius Research analyst Ben Reitzes predicts that if Broadcom can land one more custom chip customer, the company's AI revenue could rise to $50 billion a year. Of course, that seems ambitious, but it's good to know that Broadcom has the ability to get close to such a lofty goal.
The company gained a new customer for its AI chips in March this year, but analysts say the new customer is Amazon, appleGiven that many companies, including NVIDIA, NVIDIA Corporation, and ByteDance (the parent company of TikTok), are developing custom in-house chips for AI workloads, it wouldn't be surprising to see Broadcom attract new customers in the future, which could make it more likely to become a prominent player in the lucrative AI chip market in the future.
Marvel Technology Case Study
We already know that Broadcom and Marvell are targeting the same AI niche, but Broadcom currently takes the top spot, which is why Marvell expects AI revenue to reach at least $1.5 billion this fiscal year, significantly lower than what Broadcom expects in the space.
Additionally, Marvell CEO Matt Murphy said during the company's latest earnings call that the company expects AI-related revenue to increase by at least $1 billion next fiscal year, bringing its potential revenue from AI chip sales to $2.5 billion next year. Aside from the fact that Marvell is a small player in the custom AI chip market, it's worth noting that the company faces headwinds in the enterprise networking, carrier infrastructure, consumer, and industrial/automotive markets.
Combined, these four segments accounted for 30% of Marvell's total revenue last quarter. And all four segments declined significantly year-over-year due to weak end-market demand. As a result, Marvell's overall quarterly revenue fell 12% year-over-year to $1.16 billion. Meanwhile, Broadcom reported 11% organic revenue growth last quarter, with revenue including its VMware acquisition growing 34% to nearly $12 billion.
But the good news for Marvel is that data center revenue jumped 87% year over year to $816 million thanks to demand for its AI chips. Add in the fact that the company expects the hard-hit segment to start stabilizing later this year, and it's easy to see why analysts expect Marvel to see impressive growth starting next fiscal year.
MRVL Revenue forecast data for current fiscal year from YCharts.
To put it in perspective, Marvell's revenue is expected to fall 2% this fiscal year to $5.4 billion, then grow 32% next fiscal year and 20% the year before that. Meanwhile, as we saw in Broadcom's revenue chart, the company's revenue is expected to grow 14% next year and 10% the year after that.
So, although Marvell is a smaller custom AI chip player compared to Broadcom, it is expected to grow faster due to its smaller revenue base.
verdict
Ultimately, Marvell's smaller size means AI can drive change in a more meaningful way for the company, potentially enabling it to post faster growth than Broadcom. At the same time, investors should keep in mind that Marvell's stock trades at 11 times sales, lower than Broadcom's 15 times sales.
That's why Marvell Technology has the potential to achieve faster growth at a cheaper valuation, and it looks like the better AI stock out of the two companies discussed in this article.
JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool property. John Mackey, former CEO of Amazon subsidiary Whole Foods Market, serves on The Motley Fool's board of directors. Randi Zuckerberg, former director of market development and communications at Facebook and sister of Meta Platforms CEO Mark Zuckerberg, serves on The Motley Fool's board of directors. Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon, Apple, JPMorgan Chase, and Meta Platforms. The Motley Fool recommends Broadcom and Marvell Technology. The Motley Fool has a disclosure policy.
