Broadcom (AVGO 3.84%) is one of the lesser-understood mega-caps in the semiconductor industry. As a B2B provider of semiconductors and enterprise software, it receives little exposure from the general public.
However, its success has taken its stock 5,100% higher since launching its IPO in 2009. And with demand for semiconductors and enterprise software increasing, it is likely to continue delivering significant returns for investors.
Broadcom's share price growth
Broadcom launched its IPO at an opportune time. The company, then known as Avago Technologies, debuted almost a year after the global financial crisis when stocks had begun a recovery from one of the most notable declines in history.
When it debuted, it sold for $15 per share, meaning an investor with $5,000 would have bought 333 shares. Today, the value of that investment would have grown to more than $283,000.
Even better, that figure does not include dividend payments, which began in 2010. The payout has increased at least once annually since that time. Today, the annual dividend stands at $18.40 per share, a dividend yield of around 2.1%.
But that yield applies to new shareholders. Those who bought on the IPO day and held the shares will earn a cash return of $6,127 this year. That amounts to a 123% yearly return without selling a single share!
How it grew
The company now known as Broadcom began in Singapore as a semiconductor provider for businesses. Its strategy involved employing engineers near its largest customers. This way, the company would collaboratively design chips that met the needs of its clients.
Consumers typically do not interact with these products directly. However, one of its better-known chips supports the personal hotspot on Apple's iPhone.
It would also increase its capabilities by acquiring other companies, it applies to this day. Hence, its most notable purchase to date was likely the former Broadcom, which allowed the company to later adopt that name. With this move, it also would eventually move its headquarters from Singapore to San Jose.
Moreover, with the natural cyclicality of the chip industry affecting financials, Broadcom pivoted into the enterprise software industry with key acquisitions in 2018 and 2019.
Additionally, it has sought to grow this segment further by acquiring VMWare. If successful, this acquisition will mean software makes up approximately 40% of its revenue, up from just over 22% now. That purchase gives Broadcom considerable diversification away from semiconductors.
Broadcom's future
The good news is both its segments, semiconductor solutions and infrastructure software, should stay on a growth path. Fortune Business Insights forecasts a compound annual growth rate (CAGR) of 12% through 2029 for the chip industry. Also, Grand View Research predicts a CAGR for the enterprise software industry of 12% through 2030.
The company's growth has posted revenue growth consistent with those predictions. Although the chip industry has experienced a downturn, the $27 billion in revenue Broadcom reported in the first nine months of fiscal 2023 (ended July 30) rose 9% versus the same period in 2022.
Furthermore, slower growth in operating expenses resulted in a net income of nearly $11 billion during the period, rising 33% versus one year ago.
These increases have helped take Broadcom's market cap to more than $350 billion, a level making another 5,100% increase in the stock price unlikely to occur. Nonetheless, that long-term trend should continue to bolster both the semiconductor stock and the dividend. That means shareholders should continue to profit as Broadcom serves more business clients.
