Each of the six publicly traded companies with a market capitalization exceeding $1 trillion has played a significant role in the advancement and development of artificial intelligence (AI). Four of them have split their stocks in the last five years.
It might not be long before another AI stock-split stock joins the ranks. Broadcom (AVGO +4.58%) has emerged as a key supplier of AI data-center chip designs, complementing its other semiconductor designs and enterprise-software business.
With its market capitalization around $850 billion, as of this writing, Broadcom needs to gain 18% to reach the $1 trillion milestone. Here's why it's bound to get there.
Image source: Getty Images.
A diversified semiconductor and software giant
Broadcom's roots are in semiconductor design, and it has developed a strong portfolio of intellectual property that has served it well in the AI arms race among big tech companies.
Broadcom's networking chips are essential infrastructure for AI data centers. While Nvidia's graphics processing units (GPUs) get all the headlines, it's Broadcom's chips that allow a company to get the most out of the billions of dollars it is spending on those GPUs. Broadcom's networking chips ensure data moves quickly and efficiently from one server to another, improving the efficiency of the data center. No company can compete with Broadcom's technology in this arena, and few customers would risk switching to a competitor due to the potential impact of using an inferior chip design and other switching costs.
Broadcom also has a growing custom chip-design business fueled by AI spending. Broadcom designs Alphabet's tensor processing unit (TPU), which Apple used to train its Apple Intelligence large language model (LLM). It's also behind Meta's MTIA chips, which help train and run Meta's Llama model. Generative AI leader, OpenAI, is reportedly working with Broadcom for its own custom-chip designs as well.
NASDAQ: AVGO
Key Data Points
Broadcom isn't just an AI chipmaker, though. It holds a dominant position in wireless phone chips that improve 5G reception while extending battery life. It also makes WiFi and Bluetooth chips. Its chips are found in Apple's iPhone as well as in many other high-end smartphones.
Broadcom has also made strategic acquisitions of enterprise software providers over the last few years, including Symantec and VMWare. It uses a land-and-expand strategy focused on selling multiple software solutions to a small group of large enterprise customers. That provides a growing and very sticky source of recurring revenue.
Powering the future of artificial intelligence
Broadcom's networking chips are already essential infrastructure for AI. Over the next few years, more and more big tech companies will likely come to rely on its custom AI accelerators as well. Google and Meta are already spending heavily on custom silicon designed by Broadcom.
As AI development matures, investors can expect a greater focus on custom-chip designs like Google and Meta's. That's because these chips can be less expensive than general-purpose GPUs, and they use less energy for the same tasks. As a result, I expect them to account for a growing share of silicon in AI data centers.
Broadcom's AI chips business is still a small piece of its operations, but it's growing extremely quickly. Its ethernet switching-chip sales grew more than 4x year over year in the third quarter, and AI accelerator sales grew 3.5x year over year. Both should continue to drive strong results for Broadcom into the future.
The path to $1 trillion
Broadcom's stock currently trades for about 29.5 times earnings estimates for 2025.
Broadcom should see improved earnings performance next year as it trims excess operating expenses related to its acquisition of VMWare in late 2023. Those trims should result in strong operating margin expansion. Even better, the long-term potential for operating leverage remains high even as its AI chips business scales and it builds its recurring revenue enterprise software business. Over time, Broadcom should see earnings growth outpace revenue growth.
AI chips could drive extremely strong revenue growth over the next few years. And with improved operating leverage, it should produce the earnings growth needed to justify its price-to-earnings (P/E) ratio.
In order to reach a $1 trillion valuation, Broadcom stock will have to reach a share price of about $214. That would put its valuation at roughly the same 29 times forward P/E at the end of next year based on current analysts' estimates. If Broadcom can outperform expectations, it might reach the $1 trillion milestone even sooner.
Based on its current price and the current outlook for the business, it looks like the stock trades for fair value and could be worth a spot in your portfolio.
