Artificial intelligence (AI) offers many exciting possibilities in the long term, but the technology’s hunger for computing power is a certainty that has led to remarkable growth in semiconductors. Chip companies like Nvidia (NASDAQ:NVDA) And Broadcom (NASDAQ:AVGO) have come to the realization that AI creates billions of dollars in opportunities for everyone. Since January, both stocks have outperformed S&P 500with Nvidia leading the way with an increase of over 180%.

Both companies are expecting big things in 2025, with Nvidia launching the successor to its hugely popular Hopper AI chip architecture. At the same time, Broadcom recently announced significant AI chip deals that are expected to fuel growth in the next few years.

But which stock is the better buy for 2025?

Nvidia is probably the well-known name in AI among investors. The company’s expertise in GPU (graphics processor) chips translated well to AI. Nvidia’s Hopper accelerator chip architecture has become the gold standard for technology companies developing AI, which requires a lot of computing power to train on massive amounts of data.

The H100 chip remains popular, but Nvidia is introducing Blackwell chips, the next-generation architecture to meet the increased demands of smarter AI models. Nvidia CEO Jensen Huang believes Blackwell could be the company’s most successful product. Analysts expect Nvidia to grow earnings by an average of 38% over the long term, reflecting these high expectations.

Broadcom has a long, successful history in semiconductors and specializes in networking and other connectivity applications. However, it is no longer just a chip business; The company specializes in enterprise infrastructure software, which now accounts for about 41% of total revenue. Broadcom is also becoming increasingly involved in the area of ​​AI chips. In fiscal year 2024, AI-related revenues totaled $12.2 billion, up 220% year-over-year.

Management recently confirmed several blockbuster deals to develop AI inference chips for big-name AI companies (unnamed but rumored to include OpenAI and Apple) with its XPU (Extreme Processing Unit) chips. Broadcom believes its total AI potential could be between $60 billion and $90 billion by 2027, with management predicting significant market share. Analysts expect Broadcom’s long-term earnings growth to average nearly 22% per year.

Overall, both companies appear to have found room for success in the AI ​​space.

Since both companies appear to be well-positioned for growth, the better buy may come down to which company offers the best value for money. The PEG ratio is excellent for this. It compares a stock’s valuation with the company’s expected growth. The lower the ratio, the better deal you get.

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When it comes to high-quality stocks, I generally like to buy stocks with PEG ratios of 2.0 to 2.5. Here’s how each company performs:

Based on these numbers, Nvidia’s PEG ratio is 1.2 versus Broadcom’s 1.8.

Remember, this ratio only tells you how much you’re paying for potential growth. Estimates are just that, meaning they are subject to change. A company’s future earnings volatility could also affect what investors are willing to pay.

Nvidia is numerically the better value. Still, Blackwell could do better or worse than expected, so there’s an argument that Nvidia is a riskier stock than Broadcom, a more diverse company.

With both stocks trading at PEG ratios well below what I consider appropriate, long-term investors can buy one (or both) of them today. That means there is a winner.

I would probably choose Broadcom if both stocks were trading at similar PEG ratios because the company is less dependent on AI. However, Nvidia and its lower PEG ratio seem to value this risk. A PEG ratio of 1.2 is a bargain for most stocks, let alone arguably the world’s leading AI company.

It also seems unlikely that AI is a fad; Too much money flows into the industry for that. Meanwhile, Blackwell appears poised to continue Nvidia’s dominance, and innovations in AI technology could also spur demand for increasingly complex AI chips. Therefore, the future looks bright for both companies, but Nvidia is the better buy heading into 2025.

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Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple and Nvidia. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.

Which AI chip stock is the better buy for 2025: Nvidia or Broadcom? was originally published by The Motley Fool