Broadcom (AVGO 0.65%) stock has delivered impressive returns to investors in the past five years. An investment of $1,000 made in mid-March 2020 would have grown into a holding worth more than $8,300 thanks to robust demand for the company's chips, which are deployed in a host of applications ranging from smartphones to data centers to cloud computing to broadband to storage, among others.
The chip designer's returns in the last five years have easily outpaced the 112% gains clocked by the Nasdaq-100 Technology Sector index. The good part is that Broadcom seems well-placed to outperform over the next five years as well. That's because the company now has a new catalyst that has the potential to add several billion dollars to its top line.
NASDAQ: AVGO
Key Data Points
AI is supercharging Broadcom's growth
Broadcom designs application-specific integrated circuits (ASICs), which are custom chips used for performing specific tasks. That contrasts with central processing units (CPUs) and graphics processing units (GPUs), which are general-purpose in nature.
Demand for ASICs has increased remarkably because of the growing use of AI software. Cloud computing giants have been using more of the custom chips designed by Broadcom to train and deploy AI models in the cloud because of the cost-efficient nature of these chips. As ASICs are designed to tackle specific workloads, they can deliver faster performance on those tasks than GPUs while consuming less energy.
As a result, Broadcom's AI revenue in fiscal 2024 jumped by more than 300% from the prior year to $12.2 billion. Its AI revenue is on track to grow at a remarkable pace in its current fiscal year as well.
The chipmaker witnessed a 77% year-over-year increase in its AI revenue in its fiscal 2025 first quarter (which ended on Feb. 2) to $4.1 billion. Management is forecasting a sequential jump in its AI revenue in the current quarter as its "hyperscale partners continue to invest in AI XPUs and connectivity solutions for AI data centers."
Importantly, Broadcom is scratching the surface of a massive end-market opportunity in data centers. The company is forecasting that the serviceable addressable market (SAM) for its AI chips will grow to between $60 billion and $90 billion over the next three fiscal years -- and that range doesn't include the four additional customers that are working now with Broadcom to develop custom AI processors. As CEO Hock Tan said on the company's recent earnings conference call:
So, even as we have three hyperscale customers, we are shipping XPUs in volume today, there are now four more who are deeply engaged with us to create their own accelerators. And to be clear, of course, these four are not included in our estimated SAM of $60 billion to $90 billion in 2027.
What this means is that Broadcom's actual revenue opportunity in AI chips could be much larger. As such, it won't be surprising to see Broadcom's AI revenue multiplying significantly over the next five years.
Assuming that Broadcom's serviceable opportunity in AI chips jumps to $90 billion after five years (instead of three years) after accounting for the additional customers that it is bringing on board, and further assuming that it takes even half of this market, its AI revenue five years from now could be about $45 billion. That would be almost four times its fiscal 2024 AI revenue.
However, Broadcom reportedly controls 70% of the custom AI chip market, according to various third-party estimates. The pace at which the company is adding new customers for its AI processors indicates that it could indeed maintain its dominant share for the next five years. If that's the case, Broadcom's AI revenue alone could exceed $60 billion annually in 2030 (based on the $90 billion SAM estimate). That would be about five times as much as last year.
How much upside can investors expect?
The fact that Broadcom's top line could grow at an incredible pace thanks to its massive AI-related opportunity explains why analysts are upbeat about the company's bottom-line growth prospects as well. Broadcom's earnings are expected to grow by 36% in the current fiscal year to $6.62 per share, followed by healthy double-digit percentage growth over the next couple of years.
AVGO EPS Estimates for Current Fiscal Year data by YCharts.
Assuming that the company manages to maintain an annual earnings growth rate of even 20% in fiscal 2028 and 2029, its bottom line could hit $13.13 per share after five years. Broadcom is currently trading at 30 times forward earnings, which isn't all that expensive when compared to the tech-laden Nasdaq-100 index's earnings multiple of 29.
If Broadcom is still trading at that earnings multiple after five years, based on this premise, its stock price would have more than doubled to $394. However, investors shouldn't rule out even healthier gains, as the market may reward Broadcom with a premium valuation for its AI-driven growth.
