Broadcom (AVGO 0.65%) has been an outstanding investment over the past three years, as shares of the semiconductor giant have shot up an impressive 240% during this time and outpaced the 27% gains clocked by the PHLX Semiconductor Sector index over the same period.
Investors may be wondering if this chipmaker has enough fuel in the tank to sustain its impressive rally for the next three years as well and if it is worth buying Broadcom stock following the solid gains it has already clocked. In this article, we will examine Broadcom's catalysts for the next three years, check to see if this semiconductor stock is capable of delivering more upside, and analyze its valuation to find out if it is still a good bet for investors looking to add a chip stock to their portfolios.
NASDAQ: AVGO
Key Data Points
A massive catalyst could power years of growth for Broadcom
Broadcom recently announced its results for the fourth quarter of fiscal 2024 (which ended on Nov. 3). The company's annual revenue grew 44% from the previous year to a record $51.6 billion. Broadcom's organic revenue growth stood at 9% for the year after, excluding the contribution from VMware, which was acquired in November last year.
The chipmaker's fiscal 2024 non-GAAP (adjusted) earnings came in at $4.87 per share, an improvement of 15% from the previous year. The good part is that Broadcom's guidance for the first quarter of fiscal 2025 suggests that it is on track to grow at a faster pace this year. The company has guided for $14.6 billion in revenue for the current quarter, which would be a 22% increase over the year-ago period.
Though Broadcom hasn't issued full-year guidance, analysts are expecting the company's top line to increase by almost 19% in the current fiscal year to $61.1 billion. Even better, the semiconductor specialist's top line is expected to clock 15% growth over the next couple of fiscal years as well.
AVGO Revenue Estimates for Current Fiscal Year data by YCharts
The important thing to note in the chart above is that Broadcom's revenue estimates have been hiked sizably for all three fiscal years. That can be attributed to the fast-growing demand for Broadcom's artificial intelligence (AI) chips, which are being deployed in data centers for AI model training and inference, as well as to enable faster connectivity between servers for tackling AI workloads.
More specifically, Broadcom's AI revenue shot up an incredible 220% in fiscal 2024 to $12.2 billion. The company expects solid growth in the AI business in the current quarter as well, forecasting a 65% year-over-year increase in revenue from sales of AI chips to $3.8 billion. However, don't be surprised to see Broadcom's AI revenue growth getting even better as the year progresses.
That's because two additional hyperscale customers have selected Broadcom's custom AI processors for deployment. Its custom chips are already used by major cloud service providers that are looking to reduce their dependence on expensive graphics cards from Nvidia for their AI needs. The expansion of the company's customer base will put it in a stronger position to make the most of a massive growth opportunity.
Broadcom management remarked on the latest earnings conference call that the serviceable addressable market for its custom AI accelerators and networking chips could range between $60 billion and $90 billion by fiscal 2027. Assuming the size of the market lands at the midpoint of $75 billion, and Broadcom manages to sustain even a 50% share of the custom chip market at that time as compared to its current market share of 55% to 60%, according to JPMorgan, its AI revenue could hit $37.5 billion in fiscal 2027.
That would be nearly triple the AI revenue that Broadcom generated in the previous fiscal year. However, if Broadcom manages to maintain its share of the custom chip market at 60%, and the size of the market indeed hits $90 billion as per the company's estimates, then its revenue from AI-related sales could easily exceed $50 billion.
In that case, Broadcom's overall revenue in fiscal 2027 could be well above analysts' expectations that we saw in the chart earlier since its incremental AI revenue could jump by around $40 billion from last year's levels (assuming Broadcom's other business segments don't show any growth).
Is the stock still worth buying?
The good part about Broadcom is that it is still trading at an attractive 35 times forward earnings. That isn't very expensive when we consider that the Nasdaq-100 index (using the index as a proxy for tech stocks) has an identical price-to-earnings ratio.
What's more, Broadcom's price/earnings-to-growth ratio (PEG ratio) is just 0.63 as per Yahoo! Finance, based on the five-year earnings growth that the company is expected to deliver. A PEG ratio of less than 1 means that a stock is cheap with respect to its estimated earnings growth over the next five years, and Broadcom is quite attractive on this front.
So, investors looking to add an AI stock that is attractively valued and capable of delivering strong gains over the next three years to their portfolios can consider buying Broadcom as it seems well placed to sustain its rally.
