Seven of the world's top technology stocks have recently been dubbed "The Magnificent Seven."
Of course, the definition of the market's elite stocks keeps changing. After all, this vaunted group used to be called the FAANG stocks, until Netflix dropped out and Nvidia and Microsoft displaced it.
So which company outside the Magnificent Seven has the potential to displace one of its current members? One tech giant seems like a strong candidate, especially since it's already larger than Tesla and just made a potentially transformative acquisition.
Broadcom is broadening its reach
The stock in question is Broadcom (AVGO 3.84%), which is up 11% this year to reach an impressive market cap of $575 billion, making it the 13th largest company in the world today, and the 12th largest if one excludes Saudi Aramco.
Unlike the Magnificent Seven, Broadcom has assembled its current roster of businesses mainly through acquisition. CEO Hock Tan has been a master of the strategy, buying high-quality but bloated tech businesses, then folding those franchises into Broadcom's corporate umbrella.
Yet while that strategy may be a tad different from other Magnificent Seven stocks that primarily grew organically before making larger acquisitions later on, Broadcom shares a number of qualities with the other Mag Seven companies: strong competitive moats, high margins, technology innovation, and a platform likely to benefit from generative AI.
Broadcom's growing empire
Like some Magnificent Seven stocks, Broadcom may be wholly unique among tech stocks. That's because after its massive acquisition of VMware in October, the company is now almost equally diversified between semiconductors and software. Prior to the closing of VMware, Broadcom generated less than 25% of revenues from software, and was primarily known for its leading semiconductors for networking and communications.
There aren't many companies that are equal weight software and semiconductors – usually companies are either on the hardware or the software side. But with a new emphasis on software, Broadcom may really turn some heads. And that's doubly true if VMware's new hybrid cloud platform takes off as much as management proclaims.
VMware's new offering
On the first quarter conference call with analysts, management noted it expects VMware's revenue to grow double-digits sequentially in each quarter this year. This obviously amounts to at least 40% growth for VMware in fiscal 2024. That's stunning, as VMware really wasn't growing its top-line that fast prior to the acquisition. In fact, in the quarter prior to the acquisition, VMware grew revenue only 2%.
However, Broadcom's upselling strategy appears to be working with help from VMware's new virtualized AI product called the VMware Cloud Foundation (VCF). VCF virtualizes large enterprises' data centers, including compute, storage, and networking, giving large corporations a "cloud-like" experience with their on-premises data centers. In addition, VMware announced a partnership with Nvidia last summer, which will allow VCF to also run Nvidia GPUs in an offering called VMware Private AI Foundation. This allows customers to run AI models in their own data centers, which large corporations like for the privacy and security on-premises data centers provide.
Overall, Broadcom expects its software segment, including Symantec, California Technologies, and now VMware to bring in over $20 billion in revenue this year. That's compared with just $7.6 billion software revenue in fiscal 2023.
Image source: Getty Images.
Broadcom's other AI segments
Besides the much-improved software offerings, Broadcom has two high-growth AI hardware businesses. One is in networking, where Broadcom dominates switch and router semiconductors through its Tomahawk and Jericho chipset brands. These brands are used in most leading data center switches and routers, enabling the lightning-fast ethernet connections needed for AI training and inference today.
The second AI business going gangbusters right now is Broadcom's custom ASIC (application-specific integrated circuit) business. In this business, Broadcom contributes its IP to third-party AI chips, such as Alphabet's Tensor processing units. With basically all the cloud computing giants now looking to design their own in-house AI chips, this business is seeing very strong growth today.
These AI chip businesses are skyrocketing, growing from very little revenue a few years ago to billions of dollars today. This year, management sees the AI offerings garnering more than $10 billion in revenue, accounting for 35% of Broadcom's total 2024 semiconductor revenue. That forecast is already up significantly from last quarter, when Broadcom forecast its AI chips would only make up 25% of the chip segment this year.
The rest of the portfolio is in cyclical growth sectors
Broadcom's other businesses don't have the eye-opening growth prospects of AI chips, but they do have strong franchises and high margins. For instance, Broadcom has a strong partnership with Apple, making radio frequency and wireless connectivity chips for the iPhone. In addition, Broadcom also makes a lot of leading chipsets primarily in cyclical broadband and wireless communications markets.
Vaulting into the Mag Seven?
Currently, Broadcom trades around 26 times this year's earnings estimates, and it pays a 1.7% dividend. That would put Broadcom toward the lower end of valuations for Magnificent Seven stocks, and would also make it the one with the highest dividend yield.
That leaves room for growth, and those analyst earnings estimates may be too conservative as well. After all, Broadcom has consistently beaten analyst estimates over the years, and has been raising its outlook for AI revenue practically every quarter as of late, suggesting conservatism by management.
Furthermore, with VMware under its wing, Broadcom isn't just a chipmaker but a diversified tech conglomerate with numerous platforms. That "broad" reach also means Broadcom can hunt for new acquisitions in either the hardware or software industries, increasing its number of potential targets and ways for it to grow into the future.
With a significant part of its business benefiting from AI growth, I wouldn't be surprised to see Broadcom eventually make its way into the Magnificent Seven, or at least expand the category to an Elite Eight.
