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These 2 AI Stocks Are in a High-Stakes Cage Match Right Now

Motley Fool - Thu Sep 21, 7:33AM CDT

Stock markets continued to react Thursday morning to the latest news from the Federal Reserve the previous day, and investors didn't seem to feel comfortable with the likely future direction of monetary policy. With the Fed reaffirming its commitment to fighting inflation, interest rates could remain higher for longer than originally expected, and key parts of the stock market are having trouble with that environment. Futures on major market benchmarks were down as much as 1% Thursday morning, adding to Wednesday's losses.

Artificial intelligence (AI) has been a key focal point for investors in the stock market lately, with AI stocks generally having seen substantial gains. Yet it's important to understand that in many ways, the AI revolution involves companies fighting each other for the same business, with potential for both winners and losers. That theme is playing out Thursday morning, as shares of Broadcom (NASDAQ: AVGO) and Marvell Technology (NASDAQ: MRVL) are making significant moves. Here's the story behind what's happening with these two AI stocks.

What Broadcom shareholders are worried about

Shares of Broadcom were down more than 6% in premarket trading on Thursday. The semiconductor chip maker has its investors worried that it could lose a major client, if reports about the matter are correct.

Alphabet and its Google unit are reportedly looking at alternatives for producing specialty semiconductor chips used for artificial intelligence applications, according to an article from technology industry publication The Information. Specifically, Google could seek to make AI-enabling tensor processing units itself by building out its own in-house production capacity, taking that business away from Broadcom.

The move reportedly comes after Google and Broadcom have haggled without success over appropriate pricing for the AI-related chips. Google is looking to catch up on the AI front, as rival Microsoft has arguably gotten a quicker start in capitalizing on the opportunities in artificial intelligence. Yet despite having massive financial resources for investment, Google and Alphabet want to be cost-conscious wherever they can be.

Even if Google were to move forward with efforts to bring chip production in-house, it would likely be three to four years before its relationship with Broadcom would end. Nevertheless, the big drop in Broadcom's stock shows just how important any major business deal is in the current cutthroat environment in AI.

Could Marvell be an alternative?

Meanwhile, shares of Marvell Technology moved higher by about 4% in premarket trading. Marvell also has a role in the AI chip industry, and it's possible that it could end up being a winner at Broadcom's expense.

In addition to tensor processing units, Google also currently relies on Broadcom for chips used in its data centers. The servers in those centers need to be connected through Ethernet switches, and specialty semiconductors play a role in providing those connections. Reports suggest that Google has sought to turn to Marvell for these chips instead, which could obviously be a big win for the rival semiconductor company.

For investors across the semiconductor space, the reports serve as a warning of potential things to come. Major providers have enjoyed huge profits as a result of the need for rapid adoption of AI capabilities. But in the long run, massive companies like Alphabet and Microsoft aren't going to put up with being held captive to the pricing power of smaller companies like Broadcom and Marvell. If in-house development ends up being less expensive, those tech giants will pursue it -- and that could be a major limiting factor to the growth prospects for the entire semiconductor industry.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Dan Caplinger has positions in Alphabet and Microsoft. The Motley Fool has positions in and recommends Alphabet and Microsoft. The Motley Fool recommends Broadcom and Marvell Technology. The Motley Fool has a disclosure policy.

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