Nvidia stock and two other stocks recommended for purchase due to AI prospects

A Wall Street analyst initiated coverage of three semiconductor stocks with buy recommendations on Wednesday, pointing to their exposure to the artificial intelligence boom. These included AI kingpin NVIDIA (NVDA).

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William Blair analyst Sebastien Naji initiated coverage of Nvidia stock with an outperform rating. He also gave outperform ratings to industry peers Broadcom (AVGO) and Arm Holdings (ARM).

“Market leadership in GPUs (graphics processing units) and AI systems is driving industry-leading revenue and profit growth (at Nvidia) that we view as sustainable,” Naji said in a client note.

In addition to its semiconductor expertise, Nvidia has a comprehensive software ecosystem and a full-stack AI hardware solution, he said.

Risks for Nvidia include exposure to China (20 percent of revenue), competition from customers building their own AI processors and the growth of rival chip suppliers, he said.

Nvidia shares fall

On today's stock market, Nvidia shares fell 1.9 percent and closed at 113.37.

A positive sign is that Nvidia stock is trading near its 50-day moving average, a key support level.

One Nvidia competitor is Broadcom, which produces custom AI chips for alphabet's (GOOGL) Google, Meta-platforms (META) and others.

Broadcom is targeting AI revenue of $12 billion in fiscal 2024. About two-thirds of that will come from the custom chip business and one-third will be related to Ethernet networking solutions, Naji said.

“We see room for continued robust growth in fiscal 2025 and 2026, driven by increasing demand for customized chips, improved software monetization, recovery in non-AI semiconductors, and accelerated growth of Ethernet AI networking structures built on Broadcom's networking solutions,” said Naji.

On Wednesday, Broadcom shares fell 0.5 percent to close at 161.67.

Arm is an emerging AI player

As for Arm, Naji sees the chip designer gaining ground in the data center and AI markets. The UK-based company is already a major player in smartphones, automobiles and IoT devices.

“Arm’s royalty and licensing-based revenue model delivers best-in-class profitability,” he said.

On Wednesday, Arm shares rose 1.1 percent to close at 138.36.

Nvidia stock is listed on two IBD lists: IBD 50 and Leaderboard.

Broadcom stock is also on two lists: Big Cap 20 and Tech Leaders. Arm stock is on the IBD 50 and Tech Leaders lists.

Follow Patrick Seitz on X, formerly Twitter, at @IBD_PSeitz for more stories on consumer technology, software and semiconductor stocks.

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