AI stock Broadcom is smashing Nvidia. Should I buy it for my Stocks and Shares ISA?

Broadcom (NASDAQ: AVGO) is one AI stock outperforming Nvidia right now. This year, it has risen about 45% â almost twice the gain of its rival.

Is this one I should buy for my Stocks and Shares ISA? Letâs take a look at the numbers.

A chip and networking powerhouse

Before we get into the financials, itâs worth providing a bit of background information on this business. Because itâs not as well known as Nvidia and other popular AI stocks.

A $1.6trn market cap technology business, Broadcom operates in two main areas. These are semiconductor solutions and infrastructure software.

In the semiconductor solutions segment, it makes chips for a range of industries. Where itâs having success right now, however, is custom AI chips (XPUs) for large technology companies.

Currently, it has four customers paying (a lot) for these custom chips. We donât know who the most recent customer is (it may be OpenAI) but the others are believed to be Alphabet, Meta, and Bytedance.

The infrastructure software segment focuses on providing solutions for managing complex IT environments. This area of the business has grown significantly through acquisitions, including that of VMware, which was recently bought for around $70bn.

Strong momentum

Now, this company has significant momentum at the moment. Last week, it posted its earnings for the third quarter of fiscal 2025 and the numbers were impressive.

For the quarter, revenue was $15.95bn while net income was $8.4bn. These figures were up 22% and 37% year on year, respectively.

Zooming in on AI revenue, this was up 63% to $5.2bn. So clearly, the company is seeing high demand for its custom AI chips.

Looking ahead, management advised that it expects AI revenue to climb to $6.2bn this quarter. Meanwhile, next fiscal year, it expects it to grow by more than 60% thanks to high levels of spending by the four customers.

Itâs worth pointing out that on the earnings call, CEO Hock Tan said he believes that in the future, XPU share at its large AI customers could be bigger than GPU share. In other words, the demand for custom chips may eventually outstrip the demand for general-purpose AI GPUs designed by the likes of Nvidia and AMD.

Note that after the earnings, a ton of analysts hiked their price targets for the stock. Loads of them have gone to $400, which is nearly 20% above the current share price.

High valuation

So, this is all very exciting. But what about the valuation?

Well Iâd expect the earnings forecast to rise in the weeks ahead on the back of the companyâs strong earnings and guidance. But right now, analysts expect earnings per share of $8.73 next financial year (beginning November).

That puts the stock on a forward-looking price-to-earnings (P/E) ratio of 38. Thatâs quite a high valuation (for reference, Nvidia trades at 26).

Itâs not insanely high. But thereâs some customer concentration risk here and if one of Broadcomâs customers decided to pull back on spending and earnings are disappointing, the stock could underperform given its high multiple.

My move now

Given the high valuation, Iâm going to keep this stock on my watchlist for now.

Iâm keen to get it into my portfolio at some stage as itâs clearly a major player in AI. I think Iâll have better buying opportunities in the months ahead, however.

The post AI stock Broadcom is smashing Nvidia. Should I buy it for my Stocks and Shares ISA? appeared first on The Motley Fool UK.

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Edward Sheldon has positions in Nvidia and Alphabet. The Motley Fool UK has recommended Advanced Micro Devices, Alphabet, Meta Platforms, and Nvidia. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.