With shares up by over 2,000% over the last 10 years, Broadcom (AVGO 2.47%) demonstrates the power of long-term investing. Over that time frame, the stock has faced several macroeconomic crises -- from the COVID-19 pandemic to the rapid rate hikes of 2022 -- only to emerge even more valuable than before.
Let's discuss what the next decade could have in store for this leading semiconductor conglomerate as it pivots to new opportunities in generative artificial intelligence (AI) hardware.
The artificial intelligence opportunity
NASDAQ: AVGO
Key Data Points
According to analysts at Bloomberg, generative AI could become a $1.3 trillion market by 2032, growing at a compound annual growth rate (CAGR) of 42% over the next 10 years (from 2022). They expect training and inference hardware to drive near-term growth before the industry shifts to software and consumer-facing use cases like digital ads.
Broadcom focuses on the hardware side of the opportunity with application-specific integrated circuits (ASICS), also known as custom chips, designed for clients' specific workloads. Custom chips can be more cost-effective and efficient compared to expensive one-size-fits-all graphics processing units (GPUs) sold by rivals like Nvidia. And Broadcom's niche focus can help it hold its own in this competitive market.
Broadcom's valuation is also attractive. With a forward price-to-earnings (P/E) ratio of just 29, shares are in line with the Nasdaq-100 estimate of around 30 and significantly cheaper than other AI-exposed chipmakers like Nvidia and Advanced Micro Devices, which trade for forward P/Es of 51 and 53, respectively.
Diversification gives Broadcom strength
Over the next 10 years, AI could become a world-changing megatrend, a complete disappointment, or something in between. Right now, we don't know for sure. And that makes it risky to bet on companies like Nvidia, which have become overexposed to the industry.
After growing by an eye-watering 427% year over year (to $22.6 billion) in the first quarter, Nvidia's data center hardware business now represents around 87% of its total sales, crowding out its other segments like gaming and professional visualization and making the company exceptionally vulnerable to a potential slowdown in demand for AI chips.
Image source: Getty Images.
By comparison, Broadcom's eggs are in many different baskets. While AI is a key growth opportunity for the company, it only represented $3.1 billion of its $12.5 billion second-quarter sales (25%). And while revenue grew by 43% year over year during that period, most of the expansion can be credited to Broadcom's recent acquisition of VMware, which helps enterprise clients build customized private clouds for internal use.
While cloud computing is exposed to AI-related demand, it also benefits from the unrelated megatrend of corporate digitization. Broadcom also sells its chips and network hardware to a wide client base, including smartphone makers and internet companies. These mature industries look unlikely to experience much volatility over the coming decade.
Is Broadcom stock a buy?
The U.S. technology industry has been a gold mine for long-term investors because of its high growth and ever-expanding addressable markets. And while Broadcom is no Nvidia, its future looks bright. With a diversified revenue base and a new opportunity in AI technology, Broadcom can outperform the wider market over the next decade and beyond.
