Broadcom (AVGO 2.66%) is a popular pick in the artificial intelligence (AI) investing world. However, it's not as clear-cut as investing in Nvidia or Palantir, as both of these companies derive a significant chunk of their revenue through AI offerings.
Broadcom's product line has a far broader reach, which makes it a more diversified investment. However, diversification can also cause a company to miss out on some massive tech movements. So, is Broadcom a great AI pick? Or is its product line too widespread to benefit from this generational shift?
A non-AI division is behind Broadcom's growth
If you look at Broadcom's product page on its website, you may get overwhelmed by the sheer number of choices it presents. It offers both hardware and software, such as cybersecurity and mainframe software, as well as connectivity products. Its biggest software product came as an acquisition when it purchased VMware.
VMware provides its clients with virtual desktop services via the cloud and doesn't have much to do with AI, even if it is a useful service. VMware is also a major reason Broadcom is showing revenue growth.
NASDAQ: AVGO
Key Data Points
In third-quarter fiscal year 2024 (ended Aug. 4), Broadcom's revenue grew 47% year over year to $13 billion. However, when VMware's contribution is taken out (because VMware's results weren't included in Q3 FY 2023's results), Broadcom's revenue only rose 4% year over year.
For a company being portrayed as a strong AI investment, that's pretty weak growth, considering that other AI-centric investments are growing very quickly.
However, when you dig deeper, you'll find Broadcom's AI products crushing it.
The price tag on Broadcom's stock may be too much to pay
Broadcom's biggest AI products are its connectivity switches and the custom accelerators that Broadcom helped design, like Alphabet's tensor processing unit (TPU). Custom accelerators grew 350% year over year in Q3, and ethernet switching devices (which are used in servers to direct information flow) were up 400% year over year.
That's impressive growth for those two product lines, but the positive effect is drowned out by other Broadcom business segments that aren't doing as well.
Still, Wall Street expects Broadcom's growth to pick up in FY 2025, with 37 analysts projecting an average of 17.5% revenue growth. They clearly see these AI tailwinds having a greater effect next year, but does that make the stock a buy now?
Broadcom's stock isn't cheap. It fetches a pretty hefty premium at nearly 38 times forward earnings.
AVGO PE Ratio (Forward) data by YCharts.
Those are pretty high expectations, and so far, Broadcom hasn't met them if you strip out VMware's effect.
Broadcom is a great company with excellent products. However, because it has so many product lines, it's difficult to see the effect AI is having on the business. The market seems to believe that investors will see this effect in 2025, but that seems to be a lofty expectation, considering that AI tailwinds have been around for about a year and a half.
I think investors can pick far better AI stocks than Broadcom, as many of them are growing faster and trade for a far cheaper price tag than Broadcom (like Alphabet or Meta Platforms). Broadcom may prove me wrong, but I'm not willing to take the risk, considering the price tag at which its stock is trading.
