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.

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Details behind the move

Oracle shares surged dramatically following the release of its fiscal first-quarter earnings. It featured an ambitious forward-looking outlook that clearly got investors excited. The company significantly raised its full-year growth forecast for the Cloud Infrastructure division, projecting a 77% increase in revenue to about $18bn for the current fiscal year.

This guidance came on the heels of four multi-billion-dollar contracts announced during the quarter. This helps to reflect the surging demand for Oracle’s AI-capable cloud infrastructure. Oracle also revealed its backlog of contracted but not yet recognised revenue had ballooned to approximately $455bn. Incredibly, this is up 359% versus last year.

Investors clearly viewed this as a signal that Oracle is transforming from a software vendor into a critical backbone for AI infrastructure. Since everyone is on the hunt for the next big AI stock, the share price jump is understandable. Some contracts, such as a substantial agreement with OpenAI involving a huge amount of computing capacity, underscore Oracle’s growing role in the AI race.

When you put it all together, the jump in the stock today amounts to the largest single-day gain for the company since 1999.

Deciding what’s next

I don’t own Oracle stock. Those who do clearly will be happy today, although the extent of the move higher shows me that this did come as a surprise (albeit a positive one) for many in the stock market.

I think the stock can keep rallying over the coming year if it genuinely can pivot to being a core provider of AI-ready cloud infrastructure. The size of the current backlog suggests it already has large momentum here that will keep it busy growing for some time. Also, Oracle is still in the early stages of its cloud adoption relative to competitors. This means it has more potential for market share gains as clients look to diversify providers for capacity and pricing reasons.

Let’s also remember that Oracle is a large company with significant funding and cash flow. This means it has scope to invest large amounts into new markets if it believes there’s potential.

Of course, nothing is guaranteed. It has a price-to-earnings ratio of 54, which is very high! Even for a growth stock, this level could indicate it’s overvalued. Further, Oracle is pushing into arguably the most competitive and fast-paced sector right now, AI. The pace of innovation means companies can get left behind very fast.

Even with these risks, it’s a stock that has really caught my eye, so I’m seriously thinking about adding it to my portfolio.

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In a few short years, AI has rapidly transformed from a futuristic concept to an integral part of our daily lives. Likening its development to that of nuclear weapons, Buffett is not the only one to express significant concerns about AI’s potential dangers. 

In an open letter penned in 2023, Elon Musk, along with over 1,000 other tech leaders, urged restraint in the development of large AI experiments. The letter noted the “profound risks to society and humanity” that the technology poses.

But over the past week, it seems those fears have all but been forgotten.

A shift in AI policy under Trump

Regulations around AI have already taken a sharp turn under Trump’s new administration. After taking power on January 21, he revoked a 2023 executive order by former President Biden that mandated stricter oversight of AI technologies. 

The move signals a clear shift towards a more innovation-driven approach, with the administration emphasising the importance of maintaining US leadership in AI development. The rationale seems to be that AI will advance either way so it’s better to be ahead of the game.

While that does little to address the potential risks, it makes sense in terms of national security. Risks aside, the move is likely to provide opportunities for investors. As the saying goes, “If you can’t beat ’em, join ’em”.

AI stocks in focus

Trump has brought together three main companies to form Project Stargate, a $500bn AI infrastructure initiative. One of them is ChatGPT-developer OpenAI and the other two are the NYSE-listed tech giant Oracle (NYSE: ORCL) and Japanese conglomerate SoftBank.

The project aims to accelerate the development of AI in the US, starting with a data centre in Texas. Leading US semiconductor giant Nvidia has already seen its stock jump 5% since the news, making it once again the world’s most valuable company by market value, at $3.6trn.

Oracle

Oracle was likely chosen due to its extensive cloud infrastructure expertise and data centre management. Notable growth in this area highlights its capacity to support large-scale AI initiatives, making it a stock worth considering for investors keen on AI exposure.

But its massive debt load poses a risk. At $94.47bn, it exceeds equity by six times and cash tenfold. This could strain its ability to finance interest payments, limiting funds available for expansion. It’s not the AI risk Buffett was referring to but it’s certainly one to watch.

Revenue from cloud infrastructure increased 52% to $2.4bn for the Q2 fiscal quarter ended 9 December. Non-GAAP operating income grew 10% to $6.1bn with a margin of 43%.

“Record level AI demand drove Oracle Cloud Infrastructure revenue up 52% in Q2, a much higher growth rate than any of our hyperscale cloud infrastructure competitors”, said Oracle CEO Safra Catz.

Despite the positive results, the share price fell 8% in December but recovered 16% in the past week. At $185, it is now close to breaching the all-time high of $192 it hit in November 2024.

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To target a £43,100 retirement income, I will need a substantial pot of money. I calculate that should be around £540,000.

That might sound like a huge sum but note that it’s not a near-term target. It will likely take years of diligent saving and investing to reach it.

I’d expect to reach this goal if I can maximise my ISA allowance for 14 years, and achieve a long-term average stock market return of around 10%.

Targeting an earlier retirement

To start retirement earlier, I’d aim for a higher return though. Consider that over the past year, my own ISA has grown by over 20%. And over the past decade I’ve managed to considerably beat average returns.

Looking back, I’d put it down to careful stock picking and investing in the strongest sectors. For instance, the US tech sector has been a large driver of global stock market returns over the past decade. And that has been an area of focus for my ISA.

The bulk of my returns over the past year came from Nvidia and Meta. Both tech giants achieved triple-digit gains over the past 12 months, so that really helped my overall performance.

If I can continue to gain 20% every year, I calculate I’d reach my target within a decade. But to do this consistently will be a challenge.

Looking at past returns is useful, but looking ahead is more important. So which stocks should I consider for a new Stocks and Shares ISA?

Strongest sector right now

My favourite stocks right now tend to be in the hottest sectors. For instance, generative artificial intelligence (AI) is likely to be a mega trend over the coming decade.

But don’t just take my word for it. Last year, Nvidia noted that the world has $1trn worth of data centres installed in the cloud that are in the process of transitioning into accelerated computing and generative AI.

The market opportunity in this sector is frankly huge. But it’s not just chip makers like Nvidia that stand to benefit.

An AI play

One AI stock I’d buy next is Oracle (NYSE:ORCL). This cloud infrastructure provider reported strong earnings and a partnership with Nvidia. It’s competing with the likes of Microsoft and Amazon to provide low-cost cloud infrastructure.

According to Oracle executives, its AI infrastructure business is booming. It’s building data centres at a record level to meet demand. Some of these are relatively small, but it’s also building some of the largest ones in the world.

This mega-cap stock offers a double-digit return on capital employed and profit margin. It pays a dividend and trades on a forward price-to-earnings ratio of 20, which doesn’t strike me as expensive, given its growth outlook.

Bear in mind it has $80bn of debt, which isn’t something I want to see. So far, it’s been manageable, but I’d prefer if it pays that down over the coming years.

Overall, with spare cash in my ISA, I’d press the ‘buy’ button.

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I already own a number of AI stocks in my portfolio including Nvidia, Alphabet, and Microsoft. However, there’s space for more. With that in mind, here are three stocks I’m looking at right now.

Oracle

One tech stock I’ve had on my watchlist for quite a while now is Oracle (NYSE: ORCL). It hasn’t received the same level of attention as other tech giants in recent years and I think it’s worth a closer look at present.

Oracle offers a range of AI services including pre-trained models that can be custom trained with an organisation’s own data, machine learning (ML) services that help data scientists build ML models, and AI apps for businesses. These services are used by some big names including credit data powerhouse Experian and the UK’s NHS.

Looking beyond the company’s AI exposure, what excites me here is the growth the company is generating in cloud computing. For the quarter ended 30 November, cloud revenues were up 43% year on year.

One issue to be aware of with Oracle is that it doesn’t have the strongest balance sheet around. At 30 November, it had borrowings of around $82bn. However, this is probably reflected in the valuation. Currently, the stock’s price-to-earnings (P/E) ratio is just 18.

All things considered, I think the stock looks quite interesting at the moment.

UnitedHealth

Another stock I’m looking at currently is American health insurance giant UnitedHealth Group (NYSE: UNH). I’ve noticed that this is a top holding in a number of AI investment funds.

UnitedHealth prides itself on being a leader in its industry when it comes to AI. In recent years, it has developed a centralised data platform that uses artificial intelligence to improve patient outcomes by predicting conditions and decreasing the cost of care. It also uses AI in its virtual assistant platform to collect and classify patient data and improve customer service levels.

UnitedHealth is another stock that looks to offer a bit of value right now. Currently, the forward-looking P/E ratio here is 19. That seems very reasonable to me given the company’s solid growth track record.

One risk, however, is competition. UnitedHealth operates in a very competitive industry.

IBM

Finally, I’m also looking at IBM (NYSE: IBM). It also has a lot of experience in artificial intelligence.

IBM has bought at least five AI companies since mid-2020 including Databand.ai, Turbonomic, and WDG Automation. As a result, it now has expertise in areas such as AI-powered automation, AI-based data analysis, and AI-based risk and compliance management.

One company it has already helped in this regard is Dutch bank ABN Amro. Here, it introduced a conversational AI assistant powered by IBM Watson technology so the bank can understand customer needs in real time.

Now, IBM hasn’t been a great investment over the last decade. That’s because the company has experienced growth challenges.

Analysts do expect the company’s top line to expand going forward, however. So, I’ll be keeping a close eye on the stock. The forward-looking P/E ratio here is just 14, which suggests there could be some value on offer.

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WASHINGTON, DC — Last month, an incredible streak was broken in international sports. In a football match against Spanish League adversary Rayo Vallecano, Futbol Club Barcelona walked off the field with fewer minutes of ball possession than their opponent for the first time in 136 games. The game (which Barcelona won 4-0 nonetheless) marked the first time in three years in which Barcelona, or Barca, as it is popularly known, did not win the battle of possession.

One of the world’s elite football teams, Barcelona has enjoyed success that stretches across decades. While borrowing from different football philosophies, Barca’s style and system are unique in the football world. The principles by which the team plays, moreover, translate well into the world of investing. Let’s review four hallmarks of Barcelona’s style that have parallels in that most unheralded of sports: long-term equity investing.

One-touch, two-touch

The Barcelona style is affectionately referred to by fans as “Tiki-Taka” football. Tiki-Taka is a Spanish onomatopoeic term roughly similar to “click-clack,” the sound of the ball being passed crisply from one player to the next using only one or two touches.  This makes for remarkably efficient ball movement and furthers the primary obsession of possessing the ball. The Tiki-Taka concept maximizes ball sharing between players.

Outside game day, Barca players (whose average club salary would make any NBA owner reach for an Alka-Seltzer) relentlessly practice fundamental drills, some of which even preschoolers can emulate. In my personal favorite practice set, called “rondo,” players form a small circle, and play keep-away from two chasers in the middle, using one-touch passes. While the speed at which the team moves the ball can resemble a Japanese pachinko game, the underlying premise is utterly simple.

Investing Parallel: Buy companies that structure themselves to exchange ideas quickly and fluently.
Susan Wojcicki, employee number 16 at Google (NASDAQ: GOOG.US) and now a senior vice president of product management and engineering with the company, had this to say on idea sharing in an insightful article entitled “The Eight Pillars of Innovation:”

By sharing everything, you encourage the discussion, exchange and reinterpretation of ideas, which can lead to unexpected and innovative outcomes. We try to facilitate this by working in small, crowded teams in open-cube arrangements, rather than individual offices.

This past week, Google’s share price crossed $1,000 on stellar earnings.This is due in no small part to the profusion of ideas that are monetized year in, year out at Google. Like the Barcelona rondo drill, companies that crowd teams together and share ideas quickly have an edge.

Keep possession of the ball

By passing the ball among themselves and denying the opposition touches, Barcelona mathematically reduces their opponent’s chances to score. Hoarding the rock also wears down the rival side, until a designated assassin such as Lionel Messi or Neymar da Silva Santos Júnior (known simply as “Neymar”) slices through the defense for the kill.

While some criticize Tiki-Taka as boring, it requires an immense amount of physical skill and keen decision-making to keep the ball within your team’s possession, to say nothing of the reserves of patience the team draws upon until it is the right time to strike. 

Investing Parallel: Buy companies that don’t give up market share easily.
While Coca-Cola’s (NYSE: KO.US) revenue growth rate has slowed over the last few years, the company just recorded its 25th consecutive quarter of increased market share by value. And just as statistically, teams that control possession tend to win more games, companies that obsessively increase market share while retaining profitability tend to make great long-term investments.

The importance of the triangle

The triangle is the basic unit of the Barcelona offense. During a game, three players loosely form into a triangle, and transfer the ball via those quick, one-touch passes. Approaching teammates from any angle instantly form more triangular possibilities. This forces other teams to run more and chase the ball while Barcelona players employ their keep-away skills, expending relatively less energy. It’s a simple, logical, and efficient field formulation of which Euclid, the father of geometry, would no doubt approve.

Investing parallel: Avoid companies whose business segments are organized inefficiently, and seek out companies with superior segment organization.
Part of Hewlett-Packard’s (NYSE: HPQ.US) current malaise is its patchwork of seven gargantuan and disparate business segments, which range from “Printing” to “Storage and Networking” to “Enterprise Servers” to “HP Financial Services.” Another tech bellwether, Oracle (NYSE: ORCL.US) , describes itself as operating in just three businesses: hardware, software, and services.Which company do you think has an easier time focusing on its business?

For the last several years, in any given quarter, Oracle’s net profit margin has landed in a range of between 20% and 30%. HP’s net profit margin — when it’s been positive — has fluctuated between 2% and 8%. 

Keep the defensive line high

When Barcelona moves the ball deep into enemy territory, the entire defensive line moves up. This puts enormous pressure on their adversaries, as the field effectively becomes smaller. As triangles multiply and the short passes fly, defense and offense merge into a single organism, zinging the ball at numerous angles, but moving it methodically ever closer to the goal.

Investing parallel: invest in companies that understand how to keep pushing their defense (their existing legacy business / cash cow) while innovating in new areas.
My favorite example of this philosophy is Cisco Systems (NASDAQ: CSCO.US) . Cisco has placed bets on a number of alternate revenue streams, for example, security, which is a small fraction (3.7% to be exact) of total yearly revenue of $48.6 billion.

Yet while it expands these areas, the company never loses focus on its strength in networking. This has paid off recently, as a good chunk of computing that is migrating to the cloud runs through Cisco’s networking. To quote CEO John Chambers from Cisco’s last earnings call, networks are “squarely at the center of the cloud, mobility, BYOD (Bring Your Own Device), [and] security…” 

Parting ‘shot on goal’

There are many more investing insights you can glean from watching the sophisticated Barcelona side play. Are you a fan of football? Let me know in the comments section below what other investing parallels you notice when watching Barcelona. And fans of arch-rival Real Madrid, feel free to weigh in on your phenomenal team as well!

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