Many growth stocks stumbled in 2022 and 2023 as rising interest rates compressed their valuations and drove investors toward more conservative investments. But in 2024, many of those stocks soared as interest rates declined again.
Yet that buying frenzy also drove the major indexes to their all-time highs and inflated the valuations of many of the market's top stocks. In this kind of market, many investors might be getting reluctant to add more growth stocks to their portfolios.
That caution is warranted, but there are still plenty of high-flying tech stocks trading at reasonable valuations. One of those winners is Broadcom (AVGO +4.69%), which still has a bright future after nearly doubling in value over the past 12 months. Here's why Broadcom is still a great place to park a modest $1,000 investment.
Image source: Getty Images.
Understanding Broadcom's business
Back in 2016, the Singapore-based chipmaker Avago acquired the original Broadcom. It inherited its brand, relocated its headquarters to the U.S., and expanded into the infrastructure software market by acquiring CA Technologies in 2018, Symantec's enterprise security unit in 2019, and the cloud software giant VMware in 2023.
That rapid expansion turned Broadcom into a broadly diversified semiconductor and software maker. Its semiconductor business produces a wide range of chips for the mobile device, data center, networking, wireless, storage, and industrial chip markets.
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Key Data Points
In fiscal 2024 (which ended in November 2024), Broadcom generated 58% of its revenue from its semiconductor business and the remaining 42% from its infrastructure software business. Its semiconductor business suffered a slowdown in fiscal 2022 and 2023 as the macroeconomic headwinds drove many companies to rein in their IT spending, but it recovered over the past year as it sold more artificial intelligence (AI)-oriented chips for data centers. Its infrastructure software revenue also surged over the past year, but most of that growth was driven by its acquisition of VMware instead of its existing businesses.
|
Revenue Growth (YOY) |
Q4 2023 |
Q1 2024 |
Q2 2024 |
Q3 2024 |
Q4 2024 |
|---|---|---|---|---|---|
|
Semiconductor Solutions segment |
3% |
4% |
6% |
5% |
12% |
|
Infrastructure Software segment |
7% |
153% |
175% |
200% |
196% |
|
Overall |
4% |
34% |
43% |
47% |
51% |
Data source: Broadcom. YOY = Year over year.
In fiscal 2024, its revenue jumped 44%, its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) rose 37%, and its free cash flow (FCF) grew 10% to $19.4 billion. Its adjusted earnings per share (EPS) increased 15%.
Its near-term growth will be driven by the AI market
From fiscal 2024 to fiscal 2027, analysts expect Broadcom's revenue and adjusted EBITDA to grow at a compound annual rate of 16% and 20%, respectively. A lot of that growth will likely be fueled by its booming AI business.
Broadcom doesn't sell any powerful AI GPUs like Nvidia, but it sells networking, optical, and custom accelerator chips for data centers. More companies are upgrading their data center infrastructure with its chips to support the latest AI applications. That's why its sales of AI-oriented chips surged 220% from $3.8 billion in fiscal 2023 to $12.2 billion in fiscal 2024 -- which equals 41% of its semiconductor revenue and 24% of its total revenue. The robust growth of its AI business easily offset its slower sales of non-AI chips and infrastructure software.
During Broadcom's latest conference call in December, CEO Hock Tan said he sees the company's "opportunity over the next three years in AI as massive" as its hyperscale customers embark on "multiyear" journeys to upgrade their AI infrastructure.
Meanwhile, the growth of its other non-AI businesses should stabilize as the macro environment warms up again. It will also likely continue to expand by acquiring more chipmakers and infrastructure companies. That diversified expansion could make it a much more balanced growth play than many other chip and software companies.
Broadcom still looks reasonably valued relative to its growth
Broadcom currently has an enterprise value of $1.15 trillion, which makes it one of the world's most valuable tech companies. But it still trades at just 19 times its estimated adjusted EBITDA for fiscal 2025 and pays a forward dividend yield of 1.2%.
That makes Broadcom an undervalued play on the booming AI market, even if it's already generated massive gains for its patient investors. So if you have $1,000 to spare, it's a great place to park your cash for the next few years.
