Investors looking for stability can consider holding blue-chip tech stocks as part of the artificial intelligence (AI) race. Here, you need to identify a portfolio of companies positioned to benefit from an expanding AI market, which should translate to outsized returns over time.
Two such quality AI stocks with a competitive moat include Broadcom (NASDAQ:AVGO) and Microsoft (NASDAQ:MSFT). Let’s see why.
Is Broadcom stock a good buy?
Valued at US$634 billion by market cap, Broadcom is among the largest companies in the world, primarily engaged in the manufacturing of chip products. The ongoing market volatility has dragged Broadcom shares lower by 25% in recent trading sessions. Despite the pullback, the tech stock has returned an emphatic 1,860% to shareholders in the past decade. If we adjust for dividends total returns are much higher at 2,440%.
In the fiscal second quarter (Q2) of 2025 (which ended in April), Broadcom increased its sales by 43% year over year, primarily due to solid demand for its AI solutions. In fact, Broadcom has increased its sales from US$23.88 billion in fiscal 2020 to US$42.6 billion in the last 12 months. Its free cash flow has risen from US$13 billion to US$21.96 billion in this period.
Broadcom’s widening cash flows provide it with enough flexibility to invest in organic growth, capital expenditures, and acquisitions. It can also use the access cash to lower balance sheet debt and raise dividends.
In the past decade, Broadcom has acquired several companies, such as CA Technologies, Symantec, and VMware, allowing it to diversify its revenue base and gain traction in other segments, such as software solutions and networking.
Broadcom pays shareholders an annual dividend of US$2.10 per share, indicating a yield of 1.54%. Comparatively, its cash flow per share of US$4.24 suggests the payout ratio is less than 50%, which is reasonable. In the last 13 years, Broadcom has raised its dividends at an annual rate of 34.6%, which is exceptional as it enhances the effective yield significantly.
Priced at 28.5 times forward earnings, AVGO stock is not too expensive and trades at a 43% discount to consensus price target estimates.
Is Microsoft stock undervalued?
With a sizeable stake in OpenAI, the parent company of ChatGPT, Microsoft has already bagged an early mover advantage in the AI race. Valued at US$3 trillion by market cap, Microsoft is the largest publicly listed company globally and trades 14.8% below all-time highs.
Microsoft is focusing heavily on AI and building data centres to meet developers’ computing power demands. It has also launched the Copilot virtual assistant, which could unlock another multi-billion-dollar revenue stream for the tech giant.
In fiscal Q4 of 2024 (which ended in June), the number of customers using Copilot rose 60% sequentially. The AI tool costs US$30 per seat every month, which might be discounted for the largest enterprises.
In fiscal Q4, Microsoft’s sales increased by 15% year over year to US$64.7 billion. Its intelligent cloud business revenue rose by 19% to US$28.4 billion, while Azure sales rose by 29%.
Microsoft, similar to Broadcom, generates significant cash flow. In fiscal 2024, its free cash flow rose to US$58.6 billion or US$9.97 per share, up from US$35.87 billion, or US$5.94 per share in 2020.
