Key Points
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The market doesn’t know what to do with AMD and Broadcom as Wall Street grows concerned about AI spending.
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Sales and earnings of both companies are soaring, and AI infrastructure spending will surpass $1 trillion next year.
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AMD will continue tapping into the AI market with its CPUs and GPUs, and Broadcom has carved out a niche in the custom AI chip design market.
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Advanced Micro Devices (NASDAQ: AMD) and Broadcom (NASDAQ: AVGO) shares have been volatile over the past three months, with some drops coming even as the companies recently reported impressive quarterly sales and earnings that beat analysts’ consensus estimates.
So, why is Wall Street getting these chip stocks wrong right now? Because investors are having a hard time wrapping their heads around the sheer size and long-term potential of the current artificial intelligence (AI) infrastructure boom.
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Here’s why they’re missing it.
Image source: Getty Images.
What Wall Street gets wrong about AMD
AMD designs both graphics processing units (GPUs) and central processing units (CPUs) for a variety of products, from data centers to personal computers. AMD has played second fiddle to Nvidia in the GPU market, but remains an important player.
In second-quarter 2026, AMD’s data center revenue (which comes mainly from GPU sales) rose 107% to $6.7 billion. That growth was the main reason why AMD’s total sales spiked 50% to $11.5 billion in the quarter, outpacing analysts’ consensus estimates of about $11.3 billion. Non-GAAP earnings also increased 245% to $1.66 per share, outracing consensus estimates of $1.62 per share.
Still, AMD’s shares fell after the earnings report, continuing its several-month-long trend. Why?
I’ll concede that AMD’s shares are trading at a premium right now. The stock’s trailing price-to-earnings (P/E) ratio is 117, significantly higher than the tech sector average of 32. Some investors think that’s too high a premium to pay, and that’s a valid argument. But they may also be missing AMD’s long-term opportunities in CPUs.
AI companies are increasingly shifting their attention to CPUs because they’re fast and efficient at processing agentic tasks. This is changing how many CPUs are being added to data centers.
AMD CEO Lisa Su said that the ratio of GPUs to CPUs in servers used to be 4:1, and sometimes even 8:1. She says the processing power of AI agents is now shifting this toward a more 1:1 ratio. This change is opening up a total addressable market of $220 billion by 2030, according to AMD management.
It’s not just AMD’s leadership that’s taking notice of the shift. An analyst at Raymond James recently said that the CPU market would reach $201 billion over the next four years.
AMD is already anticipating a surge in CPU demand, too, with sales from the segment helping to increase the company’s server revenue by 70% in 2027.
I understand if investors don’t want to pay a premium for AMD stock. Still, if you’re holding off on buying it because you think the AI infrastructure market is nearing an end, or you haven’t considered AMD’s CPU opportunity, you may want to reconsider sitting on the sidelines.
Broadcom stock has one opportunity Wall Street is missing
One of Broadcom’s most important growth engines is its application-specific integrated circuit (ASIC) designs, which are used extensively in artificial intelligence data centers. Unlike general-purpose GPUs and CPUs, Broadcom’s ASICs can be designed to run specific AI models to maximize AI performance.
This is a unique play in the AI market, and it’s made Broadcom a ton of money. The company’s sales rose by 86% in the third quarter to $29.6 billion, and non-GAAP earnings popped 96% to $3.32 per share. Both beat analysts’ consensus estimates for the quarter.
Broadcom has long been a favorite chip stock among investors, but recently it’s fallen out of favor as some investors worry that a slowdown in AI spending is imminent.
I think they’re wrong, and Broadcom management’s recent guidance proves that investors are overlooking the company’s unique opportunity. Broadcom’s leadership estimated that its artificial intelligence sales will double in 2027, reaching $100 billion.
That’s a huge increase, and it comes, in part, because Broadcom is such an important player in this space. Counterpoint Research estimates that Broadcom will have an impressive 60% market share in ASICs by the end of next year.
Broadcom has already shown chip prowess in this space, and has secured custom chip deals with OpenAI, Meta, Alphabet, and others. Many of these are also long-term contracts, extending over the next several years as Broadcom works on new chip designs for AI leaders.
For those who are still worried that AI spending will slow soon, consider that the latest research from S&P 500 Global shows that the world’s largest AI companies will spend more than $1 trillion next year on AI infrastructure, up from $750 billion this year.
This means that the current pullback in Broadcom stock is creating a buying opportunity for investors who understand Broadcom’s long-term prospects in the AI market.
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Chris Neiger has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, Broadcom, Meta Platforms, Nvidia, and S&P Global. The Motley Fool has a disclosure policy.
