The artificial intelligence (AI) boom has supercharged Broadcom's (AVGO +0.83%) growth in recent quarters, with the company now getting a significant chunk of its revenue from selling custom processors and networking chips deployed by major cloud service providers in their data centers.
The stock has made a big move in the past couple of months, jumping an impressive 41% as of this writing and going well past $1 trillion in market cap. The good part is that Broadcom is scratching the surface of a massive opportunity in the AI chip market that could help it sustain solid growth rates for a long time to come.
Of course, buying just Broadcom and hoping that it will help you become a millionaire isn't a smart thing to do, as any cracks in the company's growth story could send the stock plunging. However, Broadcom looks like an ideal pick for investors aiming to construct a diversified million-dollar portfolio. Let's look at the reasons why.
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Broadcom's AI revenue is set to pick up
Broadcom released its fiscal 2025 second-quarter results (for the three months ended May 4) on June 5. Its revenue jumped 20% year over year to $15 billion, while adjusted earnings shot up at a stronger pace of 43%.
NASDAQ: AVGO
Key Data Points
AI played a key role in driving this robust growth. The company's AI revenue jumped 46% year over year to $4.4 billion, which means it's now getting almost 30% of its top line by supplying chips powering this technology. What's worth noting here is that Broadcom is anticipating further acceleration in its AI revenue in the current quarter, projecting $5.1 billion in revenue. That would be an improvement of 60% from the year-ago period.
What's more, Broadcom CEO Hock Tan indicated on the latest earnings conference call that the company's AI revenue growth trajectory is sustainable. Tan remarked that the growth rate Broadcom is witnessing so far in fiscal 2025 "will presumably continue." That's not surprising, considering that Broadcom is now seeing stronger demand for its custom AI chips (known as XPUs) for inference purposes.
Management says that the three existing customers who are deploying its custom chips in data centers for AI training remain firm in their infrastructure investment plans, despite the economic uncertainty created by the tariff war. At the same time, those three customers "are doubling down on inference in order to monetize their platforms," which is why the company anticipates "an acceleration of XPU demand into the back half of 2026 to meet urgent demand for inference on top of the demand we have indicated from training."
A big reason why Broadcom should be able to sustain its impressive AI revenue growth rate is because of the massive addressable opportunity worth $60 billion to $90 billion that it sees for its AI chips by fiscal 2027 based on the three customers it's currently serving. Given that the company has generated $13.6 billion in revenue from sales of its AI chips in the first three quarters of the year, it still has a lot of room to grow in this market.
That's especially true considering that another four hyperscalers are in negotiations with Broadcom for manufacturing custom AI processors. As a result, Broadcom may be sitting on a much larger AI-related addressable market, which explains why analysts have raised their growth expectations for the company following its latest results.
AVGO Revenue Estimates for Current Fiscal Year data by YCharts
Investors are getting a good deal on this stock
Broadcom is trading at just under 38 times forward earnings as of this writing following its recent surge. While that may seem expensive at first, we have seen that the company's outstanding earnings growth justifies its rich valuation. Another important thing worth noting is that Broadcom's price/earnings-to-growth ratio (PEG ratio) based on its projected earnings growth for the next five years stands at just 0.66, according to Yahoo! Finance.
The PEG ratio is a forward-looking valuation metric calculated by dividing a company's price-to-earnings ratio by its estimated annual earnings growth rate for the next five years. A reading of less than 1 means that the stock in question is undervalued, and Broadcom's multiple is well below that mark.
All this makes Broadcom a solid growth stock to buy right now, since it seems built for terrific long-term upside and has the potential to contribute positively toward a million-dollar portfolio.
