Each of the six publicly traded companies with market capitalizations exceeding $1 trillion has played an important role in the advancement and development of artificial intelligence (AI). Four of them have divide their stocks over the last five years.
It might not be long before another AI split action joins the ranks. Broadcom (NASDAQ:AVGO) has become a key provider of data center AI chip designs, complementing its other semiconductor designs and enterprise software business.
With a market cap of around $850 billion, Broadcom, as of this writing, needs to gain 18% to reach the $1 trillion mark. Here’s why it’s bound to get there.
A diversified semiconductor and software giant
Broadcom’s roots lie in semiconductor design, and the company has developed a strong intellectual property portfolio that has served it well in the AI arms race among big tech companies.
Broadcom’s networking chips provide critical infrastructure for AI data centers. While NvidiaGraphics processing units (GPUs) make headlines, it’s Broadcom’s chips that allow a company to get the most out of the billions of dollars it spends on these GPUs. Broadcom’s network chips ensure fast and efficient transfer of data from one server to another, improving data center efficiency. No company can compete with Broadcom’s technology in this area, and few customers would risk switching to a competitor due to the potential impact of using an inferior chip design and other switching costs.
Broadcom also has a growing custom chip design business, fueled by AI spending. Broadcom Designs Alphabetthe tensor processing unit (TPU), which Apple accustomed train your large Apple Intelligence language model (LLM). It’s also the origin of Meta’s MTIA chips, which help train and run Meta’s Llama model. Generative AI leader OpenAI is also reportedly working with Broadcom for its own custom chip designs.
Broadcom is not just an AI chip maker, however. It has a dominant position in wireless phone chips that improve 5G reception while extending battery life. It also makes WiFi and Bluetooth chips. Its chips are found in Apple’s iPhone as well as many other high-end smartphones.
Broadcom has also made strategic acquisitions of enterprise software vendors in recent years, including Symantec and VMWare. It uses a scale-up and scale-up strategy focused on selling multiple software solutions to a small group of large enterprise customers. This constitutes a growing and very persistent source of recurring revenue.
Powering the future of artificial intelligence
Broadcom’s network chips already provide critical infrastructure for AI. Over the coming years, more and more large technology companies will likely rely on its custom AI accelerators as well. Google and Meta are already spending heavily on custom silicon designed by Broadcom.
As AI development matures, investors can expect to focus more on custom chip designs like those from Google and Meta. This is because these chips can be cheaper than general-purpose GPUs and consume less power for the same tasks. As a result, I expect them to account for a growing share of silicon in AI data centers.
Broadcom’s AI chip business is still a small part of its operations, but it is growing extremely quickly. Its sales of Ethernet switching chips increased more than 4 times year over year in the third quarter, and sales of AI accelerators increased 3.5 times year over year. Both of these businesses should continue to generate strong results for Broadcom going forward.
The path to $1 trillion
Broadcom stock currently trades at around 29.5 times estimated 2025 earnings.
Broadcom is expected to see its profits improve next year as it reduces excess operating expenses related to its acquisition of VMWare in late 2023. These reductions should translate into strong operating margin expansion. Better yet, the long-term potential for operating leverage remains high, even as its AI chip business evolves and it grows its recurring revenue enterprise software business. Over time, Broadcom should see earnings growth outpace revenue growth.
AI chips could generate extremely strong revenue growth over the next few years. And with improved operating leverage, it should produce the earnings growth needed to justify its price-to-earnings (P/E) ratio.
In order to reach a $1 trillion valuation, Broadcom stock will need to reach a share price of around $214. That would put its valuation at roughly the same level of 29 times forward P/E at the end of next year, based on current analyst estimates. If Broadcom can beat expectations, it could hit the $1 trillion mark even sooner.
Based on its current price and the company’s current outlook, it appears the stock is trading at a fair value and could be worth a place in your portfolio.
Should you invest $1,000 in Broadcom right now?
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Randi Zuckerberg, former director of market development and spokesperson for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Adam Levy holds positions at Alphabet, Apple and Meta Platforms. The Motley Fool holds positions and recommends Alphabet, Apple, Meta Platforms and Nvidia. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
1 Split Stock of Artificial Intelligence (AI) Stock Poised to Join Nvidia, Apple, Microsoft, Amazon, Alphabet and Meta in the $1 Trillion Club was originally published by The Motley Fool