To The Moon

Yesterday, chip stocks surged again, with giants like $NVIDIA Corp(NVDA)$ $ASML Holding NV(ASML)$ $Taiwan Semiconductor Manufacturing(TSM)$ all hitting record highs!

After this huge rally, Nvidia's stock price is closing in on the $1000 mark. Its next target? Surpassing $Apple(AAPL)$ and becoming the world's second-largest company by market cap!

Crazy for AI, should we still invest in semiconductors?

Well, coincidentally, two AI leaders released their earnings reports yesterday: $Broadcom(AVGO)$ and $Marvell Technology(MRVL)$. There were plenty of highlights, giving us a glimpse of the bigger picture.

First, Broadcom's strength lies in its Ethernet switch chips that allow AI components to work together seamlessly. Take their newly released PCI Express Gen5/Gen6 Retimer chip for example. It improves high-speed connectivity between AI processors in data centers.

Wall Street analysts ranked Broadcom as the second biggest AI chip stock winner after Nvidia.

Broadcom's AI revenue doubled in the last quarter, reaching $2.3 billion. That easily offset the current cyclical slowdown in enterprise and telecom companies, driving overall revenue up 11% (excluding the impact of $VMware(VMW)$ acquisition).

According to the company's CEO, AI will contribute 35% of their semiconductor solutions revenue in fiscal 2024, up from the previous forecast of 25%.

Combine that with $Advanced Micro Devices(AMD)$ upping their shipments for the AI GPU MI300, and investors are seeing a rosy picture of AI demand surpassing expectations!

Yeah, AI demand is hot, that's a consensus. But after these stock price spikes, some are worried about a bubble.

But looking at Broadcom, their valuation isn't in bubble levels yet.

Management expects fiscal 2024 revenue to hit $50 billion, up 40% year-over-year, of which the highly profitable software business will reach $20 billion (mainly due to the acquisition of Vmware).

With the Vmware acquisition bringing asset restructuring costs, Broadcom's profitability might be impacted. But analysts predict fiscal 2025 revenue of around $55.8 billion, with a gross margin of 77% and an adjusted net margin of 48.8%.

Conservatively speaking, Broadcom's 2025 profit could hit $26.8 billion, and at its current market value of $652 billion, it trades at 24 times earnings.

Compared to historical valuations, a forward PE of 24 isn't expensive at all. It's far from a bubble:

And then there's Marvell. They're a leading global semiconductor company providing full-suite broadband communication and storage solutions. AI needs tons of bandwidth, and Marvell is a supplier to Nvidia. Their datacenter business accounts for a whopping 53.6% of total revenue.

In the quarter ending January 31st, Marvell's datacenter revenue was $765 million, up 53.8% year-on-year. It was the only segment to maintain positive growth:

Management expects datacenter revenue to grow quarter-on-quarter in the next quarter, while other businesses are expected to recover in the second half.

Looking at their price-to-sales ratio, Marvell's valuation hasn't exceeded the high point in 2021, when the semiconductor industry was in the boom cycle. Considering AI and semiconductors are about to enter another cycle, Marvell's valuation still has room to expand. At least, we're not talking about a bubble right now:

From Broadcom and Marvell, it's clear that AI is driving massive growth in chip stock earnings. Although valuations have risen significantly, they're still not in bubble levels. The chip stock bull market is still on the roll!