Broadcom (AVGO 1.63%) doesn't get quite as much attention as artificial intelligence winner Nvidia, but it probably should.
Broadcom's stock exploded after its recent earnings on Dec. 12, based on forecasts for massive AI-related revenues over the next few years. But after its year-to-date gains of just over 100%, the company recently clearing the $1 trillion market cap milestone, and trading at 46 times its trailing adjusted EPS, is there still a buying opportunity in this stock?
NASDAQ: AVGO
Key Data Points
Broadcom's broad portfolio
In order to assess Broadcom's prospects in relation to its valuation, one has to dissect its product portfolio, which spans both semiconductor and software products.
The most exciting segment is Broadcom's AI semiconductor portfolio, which consists of custom AI accelerators, or "XPUs," which enable third parties to design their own AI accelerators, as well as its leading data center networking chips. The rest of Broadcom's chip portfolio consists of profitable but lower-growth broadband, telecom, and mobile chipsets.
Broadcom also has several infrastructure software franchises, including VMware, which Broadcom purchased a year ago for about $69 billion.
While software has become more important, at 41% of revenue last quarter, the biggest growth driver in the years ahead will be the company's AI chips, which we'll look at in more detail below.
AI will be big business
While Broadcom's overall results were just OK last quarter, on the conference call with analysts, CEO Hock Tan dropped a bomb: By 2027, Broadcom's addressable market at its three main XPU customers will grow to between $60 billion and $90 billion, up from just $12.2 billion in AI chip revenue in fiscal 2024.
With that outlook, investors quickly increased their estimates of Broadcom's earnings per share in the future. Not only that, but Tan also hinted there could be two other large companies that may potentially design their own XPUs with Broadcom's IP. That could even add to his projection.
Estimating the other segments
Broadcom made just over $30 billion in total semiconductor revenue in its recently completed fiscal year, leaving $17.8 billion in non-AI chip revenue. Assuming that grows 5% annually through 2027, consistent with the mid-single-digit long-term growth projected by management, those franchises would yield about $20.6 billion in non-AI chip revenue by 2027.
In software, Broadcom made $21.5 billion in fiscal 2024, with VMware making up about half of that. Non-VMware software is a slow-growth segment, but VMware has been growing fast while under Broadcom's control, posting 10% quarter-over-quarter growth. While VMware will probably decelerate, this should still be a moderate growth segment. A reasonable annualized growth rate for software would be about 10% through 2027, reaching $28.6 billion by that time.
Adding up 2027 assumptions
Putting all of these segments together, investors can start getting a sense of the big numbers Broadcom may post in 2027. Using the above assumptions and the above-midpoint assumption for AI chip guidance, we get:
|
Broadcom (AVGO 1.63%) |
2027 Assumptions |
|---|---|
|
AI semiconductor revenue |
$80 billion |
|
Non-AI semiconductor revenue |
$20.6 billion |
|
Software revenue |
$28.6 billion |
|
Total |
$129.2 billion |
Broadcom is also an extremely high-margin business. Last quarter, the company's adjusted operating margins on its semiconductor business was a whopping 56%. Not to be outdone, Broadcom's software operating margins were an eye-watering 73%, excluding VMware transition costs.
Assuming no margin expansion between now and 2027, those margins on 2027 revenue would yield a semiconductor operating profit of $56.3 billion and a software operating profit of $20.9 billion, for a total of roughly $77 billion.
Assuming $4 billion in interest expense, which is what Broadcom had last year on its $67.5 billion in debt, and a 15% tax rate projected for 2025, that total yields a 2027 adjusted net income for Broadcom of roughly $62 billion.
Some may have balked at Broadcom's ascension to clear $1 trillion in market value after earnings, but if these growth projections come to pass, that would basically put the stock at a 17 P/E multiple on those 2027 earnings figures.
Those numbers may be conservative
It's also possible Broadcom could outperform those numbers. Under Hock Tan, the company has a history of beating its projections on a regular basis. Furthermore, getting additional AI XPU and networking customers could very well push AI chip revenue past the $90 billion high-end of guidance.
Furthermore, Broadcom generated $21.9 billion in free cash flow last year, and will likely make more than that in 2025 and 2026. With that cash, the company could pay down its debt, leading to lower interest expense, or make more acquisitions.
Broadcom was built on a sophisticated M&A strategy that has worked brilliantly to date. So with the ability to expand further into either semiconductors or software in the age of AI, it wouldn't be surprising to see the company make another value-enhancing acquisition.
Taking that path to 2027 into account, Broadcom is still a reasonable buy today, even after this massive run.
