Broadcom (NASDAQ: AVGO) and Oracle (NYSE: ORCL) are two of the hottest artificial intelligence (AI) stocks in the market right now. This month, both have soared on the back of spectacular results. Now, I own a lot of AI stocks in my Stocks and Shares ISA but, annoyingly, I don’t own these two. Is it too late to buy them?
Broadcom now has four large AI customers
Starting with Broadcom, it delivered some incredible guidance recently. Thanks to high demand for its custom AI chips (XPUs), it now expects AI revenues to be up more than 60% next financial year (starting November).
It now has four major customers for its XPUs. These are believed to be Google, Meta Platforms, Bytedance, and OpenAI.
Taking a long-term view, I think this company’s revenues and earnings could rise materially from here. Not only could it sign more customers for its XPUs but it could see increased spending from the existing four.
It’s worth noting that on the recent earnings call, CEO Hock Tan said that he expects spending on XPUs by his customers to eventually exceed spending on GPUs made by the likes of Nvidia. That’s exciting.
Looking at the share price and valuation however, I’m not in a rush to buy the stock at current levels. Recently, the share price has gone a little exponential, and that turns me off.
As for the valuation, the forward-looking price-to-earnings (P/E) ratio’s about 40. That’s not outrageous but it doesn’t leave any room for a setback (eg a slowdown in AI spending from customers or the loss of a major customer).
Note that the average price target is $360, slightly below where the share price is now.
Given this set-up, I’m going to keep the stock on my watchlist for now. If it was to pull back by 20% or so, I could be tempted to have a nibble.
Oracle is seeing huge demand
Turning to Oracle, which runs data centres powered by Nvidia GPUs, it’s quite a similar set-up. Recent guidance was incredible.
For the current financial year (ending 31 May), Oracle now expects $18bn in Cloud Infrastructure revenue, 77% higher than the figure last year. Looking further out, it expects revenue of $32bn, $73bn, $114bn, and $144bn over the subsequent four years.
Remaining performance obligations (RPO) – a measure of contracted revenue that hasn’t yet been recognised – soared to $455bn, up 359% from a year earlier. These are phenomenal growth projections.
I think buying the stock for my portfolio here could be a little risky however. Recently, the share price has gone vertical.
Meanwhile, the valuation’s now quite high – currently the forward-looking P/E ratio is 44. Again, that doesn’t leave any room for a slowdown in AI spending.
Now, it’s worth pointing out that a lot of Wall Street analysts do believe that the stock can go higher. Since the recent results, many have raised their price targets to $400, which is around 33% above the current share price.
I’d rather buy at a lower valuation however. So for now, I’m going to keep the stock on my watchlist and focus on other opportunities.
