At first glance, Broadcom (AVGO 3.84%) does not look like a "Magnificent Seven" stock. The Magnificent Seven name, coined by Bank of America analyst Michael Hartnett in 2023, largely featured household names such as Apple and Amazon. Broadcom, by contrast, is a B2B company, and many investors know little about it.
Nonetheless, its $590 billion market cap now exceeds that of Magnificent Seven stock Tesla (TSLA -1.11%). Given the continual growth in its revenue, dividend, and stock price, investors should ask if it deserves recognition as one of tech's top stocks.
What is Broadcom?
Broadcom began as the semiconductor company Avago Technologies. It differed from other chipmakers because it explicitly targeted businesses, employing engineers near its top clients to collaborate on chip designs that met its customers' needs. Though numerous tech companies work with Broadcom, its best-known chip is the Wi-Fi hotspot chip in the iPhone.
Additionally, the company grew by acquisition. Among its purchases was the former Broadcom, whose name it adopted. It also entered the enterprise software business by buying other companies. In the wake of its recent purchase of VMWare, Broadcom now derives approximately 40% of its revenue from software.
Furthermore, both segments depend heavily on artificial intelligence (AI). Broadcom developed the first semiconductor to include an on-chip neural network. On the software side, generative AI supports applications such as AIOps and cybersecurity. Such capabilities likely helped drive the stock higher by more than 100% over the past year.
Broadcom's growth
However, the company's financials may also give some indication as to why it did not get included in the group that became the Magnificent Seven. In 2023, its revenue grew by 8% to $36 billion. While analysts and investors might consider that a solid performance, it is well short of Nvidia's 126% revenue growth in its most recent fiscal year, or even Microsoft's trailing 12-month revenue growth of 11%.
Nonetheless, Broadcom's net income rose 23% from year-ago levels to $14 billion. Between its bottom-line growth and its share price advances, it now trades at a P/E ratio of about 47. While that's not a record high valuation for Broadcom, it is above the company's historical averages, and higher than some Magnificent Seven stocks.
Moreover, the improved financials fueled an annual dividend increase to $21 per share, 14% above previous levels. Today, the dividend yield for new investors is around 1.7%.
Given that the S&P 500's average yield is currently 1.4%, investors may not be seeking out Broadcom for its payout. Nonetheless, investors should note that the company went public in 2009 at $15 per share. Hence, those who have held Broadcom stock since it began as Avago now earn a yield of 140% on their original investments. Also, if the double-digit percentage increases continue, new buyers could earn significant dividend returns in the coming years.
Does Broadcom belong in the Magnificent Seven?
Broadcom could make a strong case for Magnificent Seven membership. Nonetheless, investors should remember that the Magnificent Seven is merely a construct invented by one analyst and reinforced by the media.
Moreover, such designations tend to come and go. In the last bull market, the media tagged the top performers with the FAANG designation, which analysts used less frequently amid company name changes and Netflix's decline during the bear market. If the media designated Broadcom a top stock, someone would likely coin a new phrase to supplant the Magnificent Seven.
The more important question for investors is whether they should buy Broadcom stock now. Ultimately, it is a solid, growing business likely to continue producing higher profits and increasing dividends. Although its relatively high valuation may indicate that a gradual accumulation strategy would be the more prudent course, Broadcom looks like a long-term buy regardless of how analysts or the media designate it.
