AI-Powered Chipmakers: Are NVIDIA and Broadcom Undervalued?

The US Treasury yields have reached a 25-year high, surpassing the S&P 500 earnings yield. This shift in interest rates may deter investors from stocks that rely on future profits. However, this can create opportunities for value hunters to identify undervalued companies with strong cash flows.

NVIDIA (NVDA) is one such company, known for its chips powering AI data centers, gaming PCs, and automotive systems. The Compute & Networking division generates significant revenue, while the Graphics segment contributes a smaller portion of the firm's market value.

The NVIDIA moat could be undermined by an open-source platform offering cheaper alternatives to CUDA. This would allow companies like TSMC to produce their own chips, stealing away Nvidia's high-margin products. The durability of Nvidia's moat is critical for long-term investors, as it affects future cash flows and profitability.

Broadcom (AVGO) also appears on this list, with a mix of semiconductor hardware and infrastructure software generating recurring income. Broadcom's large semiconductor hardware arm contributes significantly to its revenue, alongside its Infrastructure Software segment.