Broadcom is approaching levels that few companies have ever reached.
Broadcom (AVGO 2.76%) has risen to near the top of the pyramid when it comes to stocks considered strong investments in artificial intelligence (AI). Although it’s not quite at the level yet Nvidiait’s probably just a level or two below. Broadcom is a huge company, currently worth about $780 billion.
That means it’s just a stone’s throw away from reaching the illustrious $1 trillion market cap, as it only needs to rise just under 30% to achieve this impressive feat. But could this be possible in 2025? Let’s see.
Broadcom’s growth rate is very skewed
It’s not easy to summarize Broadcom’s work because it does so much. It offers its customers hardware and software solutions in various industries and chip design services. On the hardware side, network switches have received a lot of attention because these devices are critical when building out data centers intended to train AI models.
On the software side, Broadcom has products that allow companies to control their mainframe computers, which is critical in today’s increasingly digital business environment. It also has cybersecurity software, but its largest software product came from an acquisition.
Last year, Broadcom bought VMware, which lets users set up a virtual desktop in the cloud. This has been a successful acquisition and is the main reason why Broadcom grew revenue in the last quarter.
In the third quarter of fiscal 2024 (ending August 4), Broadcom’s revenues rose 47% year over year to $13 billion. While that sounds impressive, what’s happening under the hood is much less so. If you subtract the effect of the VMware acquisition (which did not contribute to the results of a year earlier), sales increased by only 4%. That’s a substantial change and completely changes the way investors view Broadcom.
But that doesn’t mean AI isn’t helping Broadcom’s business. CEO Hock Tan said this during Broadcom’s Q3 earnings call:
As you know, our hyperscale customers continue to scale and expand their AI clusters. Custom AI accelerators grew three and a half times per year. At the factory, Ethernet switching powered by Tomahawk 5 and Jericho3-AI grew more than four times a year, while our optical lasers and thin dies used in optical interconnects tripled.
When you break that down, that’s incredible growth. Connectivity switches grew by 400%, while custom AI accelerators, such as Alphabet‘s Tensor Processing Unit (TPU), which offers better AI performance than an Nvidia GPU, increased by 350%!
These parts of Broadcom were strong; the problem is that they don’t make up an outsized portion of the business, so the impact these segments have is limited. But that could change next year.
Broadcom is looking forward to another strong year
For fiscal 2025, Wall Street analysts expect Broadcom’s revenue to rise 17% year over year. That figure includes fully integrated VMware, so it accurately reflects the true picture of revenue growth. Furthermore, earnings per share (EPS) are expected to rise from $4.82 this year to $6.17 next year, an increase of 28%.
That seems like a great company to invest in as investors can pay a reasonable price for the stock. But at 35 times forward earnings, Broadcom is a bit pricey.
With Nvidia trading at 41 times earnings and growing much faster, the company is also in the same valuation space. So investors must determine whether they should look for the next Nvidia in Broadcom, or whether they should just stick with Nvidia as it continues to perform at a high level.
Regardless, Broadcom is still on its way to that $1 trillion market cap figure. Out of an average of 27 Wall Street analysts, all have a buy rating on the stock and predict the share price will be around $199 in a year. That’s a 19% increase from the current price, but that’s not enough to grow the 30% needed to reach a $1 trillion market value.
However, if Broadcom can deliver on that level of stock performance, it will likely far outperform the broader market (as measured by S&P500), which typically grows about 10% annually, making Broadcom an excellent stock pick. If the economy grows 20% over the next year, the $1 trillion mark won’t be that far away and will likely be reached in 2026 if growth can continue.
With strong and growing demand for its AI products, Broadcom should see strength in the coming years; while I’m not sure if that’s the case the best AI stock to buy, it is a good choice and is likely to provide good returns for investors.
Suzanne Frey, a director at Alphabet, is a member of The Motley Fool’s board of directors. Keithen Drury has positions at Alphabet. The Motley Fool holds positions in and recommends Alphabet and Nvidia. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.