The stock market has seen multiple companies hit the $1 trillion mark in valuation in the past few years, the latest one being semiconductor company Broadcom (AVGO 2.39%). The stock's valuation more than doubled in 2024 as sales and profits have been soaring in recent quarters.
But has it become too expensive and too late to invest in it after such a strong year and with the stock trading at close to 40 times its projected future profits? Or could this be just the start of a much bigger rally for Broadcom, with more gains to come in 2025?
NASDAQ: AVGO
Key Data Points
Why Broadcom has been such a hot buy of late
A big reason investors have been captivated by Broadcom is the semiconductor company's potential in terms of artificial intelligence (AI) opportunities. And prior to its big run-up in value, it was still one of the more modestly priced AI stocks, with a forward price-to-earnings multiple below 30.
The company recently wrapped up its year-end results for fiscal 2024 (which ended Nov. 3). Sales totaling $51.6 billion rose by 44% year over year, largely driven by a 181% increase in infrastructure software sales ($21.5 billion) -- due in large part to the closing of the acquisition of VMware in November of 2023.
The semiconductor solutions business, its main segment, grew by a more modest rate of 7% to $30.1 billion. Included within that was $12.2 billion in AI-related revenue, which grew by 220% year over year -- likely catching investors' attention and sparking the stock's fierce rally.
A lot hinges on demand from hyperscalers
CEO Hock Tan often talks about the growth opportunities pertaining to hyperscalers: large companies with significant data centers that are scaling up their operations at a fast pace.
Amazon, Microsoft, Oracle, IBM, and Alphabet's Google and their respective cloud businesses are all examples of some key partners Broadcom works with.
Those are some great collaborators to have, but on the flip side, it also means that Broadcom may be a bit too dependent on demand from a handful of key customers. Research company Gartner projects that by the end of 2025, 30% of generative AI projects could end up abandoned because there isn't a clear payoff from all those ambitious initiatives. If that indeed happens, financial pain could trickle down from that effect and impact the needs of these hyperscalers.
Is Broadcom a good buy in 2025?
Broadcom has been rallying recently, but its growth rate hasn't taken off to such a level to suggest that the AI stock is worth such a steep premium. The semiconductor business is generating just modest growth, and although the CEO is optimistic about opportunities to help certain hyperscalers develop their own AI accelerators, investors may have already priced those opportunities into the stock's inflated valuation.
The company's growth rate has accelerated in recent quarters, but I'm not sold on this being a great stock at its current valuation. What I'll be looking for is how the company does in its next few quarters as it laps earnings results, which will include contributions from VMware. That will give investors a better indication of its organic growth and how fast the business is really accelerating.
Between Broadcom's reliance on a few customers and the potential for a slowdown in AI projects and spending in 2025, I think the conditions might be ripe for a potential correction of this high stock price, and I wouldn't be surprised if it gave back some of its gains in the months ahead.
