Broadcom (AVGO +3.64%) stock has absolutely crushed the broader market over the past three years, registering eye-popping gains of 381%, as compared to the 93% gains clocked by the PHLX Semiconductor Sector index during the same period.
So, an investment of $1,000 in Broadcom stock three years ago is now worth over $4,813. The good part is that this semiconductor giant seems built for more upside over the next three years, as it now has a new growth driver in the form of artificial intelligence (AI).
Let's see how AI is moving the needle for Broadcom and check how much upside this semiconductor stock could deliver in the next three years.
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Broadcom's growth is set to take off in the next three years
Broadcom recently announced results for the second quarter of fiscal 2025 (which ended on May 4). The chipmaker's revenue in the first six months of the fiscal year increased by 22% from the year-ago period to almost $30 billion. This puts Broadcom on track to end fiscal 2025 with $60 billion in revenue at the current run rate, which would be a 16% jump over the previous fiscal year's top line.
Analysts, however, forecast a strong increase of 22% in Broadcom's revenue this year, indicating that its growth is likely to accelerate in the second half of the fiscal year. That won't be surprising, since Broadcom's AI revenue is set to grow at a faster pace. The company is forecasting a 60% increase in AI revenue in the current quarter to $5.1 billion. That will be better than the 46% year-over-year jump that the company saw last quarter.
However, this is just the beginning of Broadcom's terrific AI-fueled growth. The company is on track to end the current fiscal year with $18 billion in AI revenue (based on its fiscal Q3 forecast, which will bring its AI sales for the first three quarters to $13.6 billion). That would be a 50% increase from fiscal 2024. Broadcom, however, has a serviceable addressable market (SAM) worth $75 billion, at the midpoint of its guidance range, in AI chips.
It sees this opportunity materializing by fiscal 2027 based on the three hyperscale cloud customers that are currently deploying its AI-tuned application-specific integrated circuits (ASICs) and networking processors. But then, that opportunity could turn out to be much larger than Broadcom is projecting. AMD CEO Lisa Su estimates that the AI accelerator market could hit a whopping $500 billion in revenue by 2028.
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Key Data Points
The custom AI processors Broadcom sells are expected to account for a fourth of that opportunity by 2028, as per its peer Marvell Technology. That would put Broadcom's addressable opportunity in custom AI chips at a whopping $125 billion after four years. That doesn't seem outlandish, considering that cloud hyperscalers such as Amazon, Microsoft, and Alphabet's Google are all rushing to develop in-house chips to power their AI workloads.
These companies are designing in-house AI processors so they can reduce operating costs by deploying custom silicon in large numbers. Broadcom benefits from this trend, as it reportedly makes custom AI chips for the likes of Meta Platforms, Alphabet, and ByteDance. The chipmaker points out that each of its three hyperscaler customers is on track to deploy 1 million cloud clusters accelerated by its custom processors by 2027.
Moreover, the company is on track to bring four new hyperscale cloud customers into its fold, which is likely to increase its addressable market further. As a result, Broadcom seems well placed to outpace analysts' growth expectations going forward.
This AI stock could skyrocket in the next three years
Broadcom's share of the custom AI chip market reportedly stands at a whopping 70%. Assuming that the company loses share in this space (which seems a tad unlikely, considering the new customers it is set to bring on board) and controls 50% of custom AI chips after three years, its AI revenue could soar to more than $62 billion a year (based on the $125 billion revenue estimated calculated earlier).
Broadcom's AI revenue stood at $12.2 billion in fiscal 2024 (which ended on Nov. 3, 2024), with the remaining $39.4 billion coming from other applications. So its revenue from AI could jump by 5x in just three years. Assuming Broadcom's revenue from its other segments remains constant after three years, its top line could exceed $101 billion after three fiscal years (with $62 billion coming from AI).
That would be much higher than what analysts are estimating.
Data by YCharts.
The stronger-than-expected growth that Broadcom may be able to deliver could pave the way for solid stock price gains over the next three years. That's why Broadcom investors would do well to continue holding this AI stock in their portfolios, as it has the potential to sustain its rally in the long run thanks to the growing demand for custom AI silicon.
