There are plenty of stocks on sale right now with the market well off its all-time highs. One of the stocks I added to my portfolio a while back due to lower prices was Broadcom (AVGO 0.08%), although its price today is lower than when I purchased it. I'd still consider adding to my position today, as it's an incredible AI company with a bright future.
With any stock, I'm not concerned about what the stock price does a week or a month after I purchase it. Instead, I'm focusing on a three- to five-year time frame, and Broadcom's outlook during that period is quite strong.
XPUs are an emerging opportunity for Broadcom
Broadcom has its fingers in many industries. Its products range from mainframe software to internet connectivity to storage systems. However, I'm most focused on its emerging product line for artificial intelligence (AI) model training. Broadcom is using its chip design expertise to assist companies in producing their own custom AI accelerators, which Broadcom calls XPUs.
XPUs are similar to graphics processing units (GPUs), which are still the most popular choice when it comes to training AI models. However, XPUs can outperform GPUs when the workload is properly set up. In the early days of AI training, the AI hyperscalers were all attempting to figure out the most efficient way to train these models. So, having a flexible computing device like a GPU was critical.
NASDAQ: AVGO
Key Data Points
Now, these hyperscalers have an idea of how to train their respective AI models, so building a device tailored to that computing method allows them to train AI models more efficiently. Furthermore, because the design work is done between Broadcom and its client, clients don't have to pay such sky-high premium as they do with Nvidia (NVDA +2.49%), the current GPU leader that has made a massive profit from its devices.
Broadcom's management team sees a massive market for these GPUs and other connectivity switches used in data centers. In its fiscal 2024, Broadcom generated $12.2 billion in revenue from this sector, up from $3.8 billion in 2023. However, management believes this segment could have an addressable market of $60 billion to $90 billion by fiscal 2027, which would indicate massive growth.
There's a key point in that $60 billion to $90 billion projection: It only comes from three clients. With two more hyperscalers slated to launch their XPUs this year and two more selecting Broadcom as a partner for their XPUs, this market range will dramatically expand from the current projection.
Given that Broadcom generated $54.5 billion in revenue over the past 12 months, its revenue could easily double in the next three to five years from one product line alone. This is huge news for investors, as Broadcom's XPU growth is a way to invest in an AI hardware stock like Nvidia was at the start of 2023.
The stock looks like a solid deal right now
Broadcom's stock trades for about 26 times forward earnings following the sell-off. Although that's a cheaper price than investors previously had to pay for Broadcom, it's still not cheaper than some of the other big tech stocks in the market.
AVGO PE Ratio (Forward) data by YCharts
However, I think there's massive growth in store for Broadcom over the next few years as its business shifts to focusing on XPUs. As GPUs start to wear out, another demand cycle will appear for AI computing hardware. While not every GPU will be converted to an XPU, there will be some changeover, allowing Broadcom to expand its revenue base dramatically.
If you can focus on the three- to five-year picture for Broadcom, it looks quite bright. At its current price, Broadcom stock is still a no-brainer buy.
