There has been a lot of talk about artificial intelligence and the impact it will have on humanity and the economy since the release of ChatGPT last November. But that enthusiasm has started to translate into enlightening financial results with Nvidia‘S (NVDA -1.32%) leads to the outbreak on May 24, about six months later.
Nvidia’s guidance seemed to validate the recent rally for semiconductors and cloud platforms in general, pushing many of those stocks significantly higher. However, for some, Nvidia may now seem a bit expensive, with over 200x earnings and 35x sales.
Image source: Getty Images.
Luckily, there are other data center-oriented chip stocks that will benefit greatly from the AI trend and have a cheaper valuation, such as the following three stocks.
Broadcom and Marvell
I group these two companies together because they have some overlap in terms of the products they offer, including Ethernet switching, optical component interfaces, storage controllers, and custom application-specific integrated chips (ASICs).
All these chips will be essential to build next-generation data centers geared towards AI applications. On the company’s recent conference call with analysts, Marvell (MRVL 1.91%) CEO Matt Murphy said:
… [L]Incoming cloud data centers connect thousands of these systems into a single cluster to provide maximum scalability for their customers, with each of these systems capable of handling tens of terabits of network traffic… central scale, these connections must be able to operate over ever longer distances. These clusters require a staggering amount of high-bandwidth connectivity, which must be delivered with extremely low latency and high reliability, and within a reasonable power envelope.
In other words, along with GPU-based computing systems, networking and switching requirements are also about to skyrocket, which will play into the hands of Marvell’s PAM4 digital signal processing (DSP) interfaces, data center interconnection, and of Teralynx 10 Ethernet switching platforms.
In the meantime, broadcom‘S (AVGO -1.53%) today’s open architecture Tomahawk and Jericho chips for merchant switching and routing, currently deployed in data centers and telecom platforms, can be easily scaled and utilized for the intense networking needs of AI data centers.
In addition to these routing, switching and optical interconnect platforms, both companies also compete in the arena of custom ASICs, which many large cloud companies use with their custom designed AI accelerators. JPMorgan Chase analyst Harlan Sur believes this will be a rapidly growing market, with Broadcom having a 35% share and Marvell having an ASIC share of around 15%. However, Sur believes both are poised to capitalize on AI’s custom design victories in the years to come.
Overall, both companies recently said they see AI-related revenue doubling this year, with another doubling next year. Broadcom notes that AI-related products account for about 15% of its semiconductor business today, but recall that Broadcom also has a software segment that accounts for about 22% of revenues, so AI chips account for a little less than that 15% in total.
Meanwhile, for Marvell, AI-related products accounted for just $200 million in revenue last year out of $5.9 billion in revenue, or about 3.3%; however, Marvell obviously sees very strong growth here. Additionally, management is not factoring in the knock-on benefits for its large storage control portfolio in its AI growth projections, which should benefit from increased data usage. Thus, the doubling of AI revenue in 2023 and 2024 may underestimate the effect of AI on Marvell’s business.
Broadcom is the most mature and profitable company, trading at just 18 times forward earnings on a 2.3% dividend. Meanwhile, Marvell is smaller, with a market cap of just $51.8 billion compared to Broadcom’s $338 billion. Marvell is currently unprofitable under generally accepted accounting principles (GAAP), but is profitable on free cash flow, due to high stock-based compensation.
The stock is trading at 40 times this year’s earnings expectations and about 25 times analyst estimates for 2025 as analysts expect profitability to increase.
And don’t sleep on Microchip
In the meantime, Microchip technology (MCHP 2.96%) it’s also not the first chip stock many think of when mentioning artificial intelligence. This may be due to the company’s microcontroller and analog focus, which are very different businesses beyond data center infrastructure.
However, Microchip’s solutions are important to the data center, and management has identified the data center as one of the Big Six megatrends it has cited and attacked as part of its Microchip 3.0 strategy it launched two years ago. In fact, Microchip’s data center segment is the largest of the six megatrends mentioned, accounting for 17.5% of sales, up from 14.2% just two years ago. Collectively, Microchip’s high-growth megatrend segments have grown from 34% to 45% of the business in just two years, with growth twice that of the entire company.
While not all of Microchip’s data center products play a role in AI, many do, including its PCIe switches, which connect servers and individual chips together rather than full-rack systems like Ethernet does. Other AI-related products include intelligent memory interfaces, data center interconnect Ethernet products, power and silicon carbide chips, and others. Everyone should benefit from the increase in computing intensity, and Microchip’s focus on sustainability and electrification should help mitigate even the heat generated by massive AI clusters in the future.
Microchip is the cheapest of the three stocks, trading at just 11.5 on this year’s earnings estimates. While its impact on AI may be smaller than the other two, Microchip’s low valuation and rising cash returns give it less of a hurdle to overcome. Meanwhile, the rest of its portfolio leans heavily towards industrial, IoT and automotive chips, which should also post resilient growth as electrification and automation trends hold through this decade.
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