We recently compiled a list of the 7 Unstoppable Artificial Intelligence (AI) Stocks To Buy Now. In this article, we are going to take a look at where Broadcom Inc. (NASDAQ:AVGO) stands against the other unstoppable AI stocks.
Is Predictive AI Taking Over GenAI?
Generative AI is taking the world by storm. This groundbreaking technology is capable of creating new content, such as text, images, and even music, based on the patterns it learns from existing data. The impact of this advancement in AI on businesses has been profound, with businesses using it to automate tasks, improve efficiency, and generate innovative solutions through personalized content.
While there are still challenges, GenAI’s potential is undeniable. AI companies have rolled out GenAI platforms, integrating large language models in them, that are a click away from the general public’s access. We talked about this earlier in our article about the 10 Best Small Cap AI Stocks to Buy According to Short Sellers. Here’s an excerpt from it:
“Large language models are a type of AI that uses deep learning techniques and massive datasets to understand, generate, and predict human language. They’re trained for all of this through statistical relationships from vast amounts of text. The reason why they became so popular in such a short time is because they can be fine-tuned for specific tasks or understand language better through specific prompts. LLMs like Gemini and ChatGPT-4 are Multimodal AI platforms that allow processing and generating multiple types of data simultaneously, such as text, audio, and visual inputs.”
GenAI has been popular recently due to advancements that have brought us models like ChatGPT-4, but predictive AI (or enterprise machine learning) has been prevalent in the business world for a longer period. It’s been used extensively for tasks like fraud detection, customer churn prediction, and market analysis. GenAI excels at creating new content, but predictive AI is better suited for tasks that involve forecasting future trends or predicting outcomes based on historical data.
Mature organizations with streamlined processes use predictive AI as it helps deliver high returns and improve the customer experience. Forbes reported that UPS saves $35 million annually by optimizing package delivery planning. A medium-sized bank could save $16 million annually by predicting fraudulent transactions. A marketing campaign could increase profit 5x by predicting consumer behavior.
GenAI spending was less than 7% of predictive AI last year. However, predictive AI’s potential remains largely untapped due to challenges in operationalization. It can operate autonomously, while GenAI often requires human oversight. It is also cheaper and has a smaller footprint than the latter. The global predictive AI market is expected to grow from $14.9 billion in 2023 to $108 billion by 2033, with a CAGR of 21.9% from 2024 to 2033, according to a report published by market.us.
Google AI’s investment of $100 billion in responsible AI initiatives, focusing on areas like healthcare, climate change, and cybersecurity, indicates this sector’s importance and potential. Similarly, SoftBank’s $3.5 billion fund for predictive AI startups and Sequoia Capital’s substantial investment in PreCog are also examples of this. In 2023, the Large Enterprises segment captured more than a 65% share in the Predictive AI market.
Predictive AI is used for large-scale operations, learning from data to predict outcomes and behaviors, and guiding millions of daily operational decisions. Such use cases are further a testament to how artificial intelligence is now an integral part of major industries of the world, whether directly or indirectly.
Methodology
To compile our list, we sifted through ETFs, online rankings, and internet lists to compile a list of 15 AI stocks. We then selected the 7 stocks that were the most popular among elite hedge funds and had gained at least 30% year to date. The stocks are ranked in ascending order of the year-to-date performance, as of September 4.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A technician working at a magnified microscope, developing a new integrated circuit.
Broadcom Inc. (NASDAQ:AVGO)
Number of Hedge Fund Holders: 130
Performance (Year-to-Date) as of September 4: 36.88%
Broadcom Inc. (NASDAQ:AVGO) makes devices that help people connect to the internet wirelessly. It makes chips for routers, gateways, and access points that use Wi-Fi, manufacturing a wide range of semiconductor components and integrated circuits, as well as software solutions. Moreover, it makes custom ASICs, which are specialized powerful processors for specific tasks, and is a monopoly-holder in the ASICs market.
In Q2, Broadcom Inc.’s (NASDAQ:AVGO) AI revenue jumped 280% year-over-year, hitting a record value of $3.1 billion. The total revenue growth was 42.99%, generating $12.49 billion in revenue. But if VMware (a subsidiary of the company) revenue was excluded, the revenue was up only 12%. Infrastructure software segment revenue of $5.3 billion was up 175% year-on-year.
Since VMware was acquired, the company modernized the product SKUs from over 8,000 disparate SKUs to just 4 core product offerings. This helped reduce problems between sales partners, and now instead of buying VMware products all at once, it’s moving towards a subscription model.
Almost 3,000 of the company’s biggest 10,000 customers are using the new cloud service now. These customers have agreed to use the service (from VMware products) for several years.
The company is also working with big tech companies to create new AI chips. CEO, Hock Tan, said that the total AI sales for 2024 are projected at $11 billion. The company’s Ethernet technology is used in 7 of the 8 biggest AI systems being used today. They say that all large-scale AI systems will use Ethernet by 2025. This means that the networking business will grow by 40%, compared to the prior guidance of 35%.
Such guidance positions Broadcom Inc. (NASDAQ:AVGO) for success. As of June 30, 130 hedge funds have stakes in it. GQG Partners is the company’s largest shareholder with a position worth $5.2 billion.
Mar Vista Investment Partners, LLC stated the following regarding Broadcom Inc. (NASDAQ:AVGO) in its Q2 2024 investor letter:
“During the quarter, we established new investments in Broadcom Inc. (NASDAQ:AVGO) and Meta Platforms. We initiated a position in Broadcom in Q2. As a skilled aggregator, Broadcom acquires firms, streamlines their operations, and invests R&D dollars in mission critical products that generate industry leading profit margins, robust cash flows and high returns on invested capital. Its primary markets include AI accelerators targeting generative AI applications, networking & wireless semiconductors, and mission-critical infrastructure software solutions.
Broadcom is well-positioned to benefit from the rapidly expanding demand for custom AI accelerator chips that support the evolution of the generative AI market. The company is the second-largest producer of AI accelerator chips behind Nvidia and leads the market in custom AI ASIC chips. Its customers include leading hyper scalers like Alphabet and Meta who are turning to Broadcom for custom silicon due to its performance and cost advantages. We believe the company is a direct beneficiary of a multi-year capital cycle driven by hyper scalers building out next-generation AI factories.
Broadcom recently acquired VMware, the leader in virtualization software targeting the enterprise market. The integration of VMware is tracking ahead of plan as management has simplified its product bundles, transitioned to a subscription revenue model, and reduced operating costs. We believe this simplified go-to-market structure will result in strong top-line revenue growth and expanding operating margins. We believe Broadcom will compound intrinsic value per share in the mid-20% range over the intermediate term as it benefits from the AI-infrastructure build-out, a cyclical recovery in its legacy semiconductor business, and modestly accelerating growth from its infrastructure software business as VMware is successfully integrated.”
Overall AVGO ranks 7th on our list of the unstoppable AI stocks to buy. While we acknowledge the growth potential of AVGO as an investment, our conviction lies in the belief that AI stocks hold great promise for delivering high returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than AVGO but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
