Broadcom (AVGO 1.19%) has become a key player in the artificial intelligence (AI) chip market thanks to its application-specific integrated circuits (ASICs). ASICs are gaining tremendous traction among cloud service providers and hyperscalers because of their cost-effective nature and performance advantages over general-purpose computing chip systems such as graphics cards.
This explains why Broadcom stock has shot up an impressive 65% in the past year, which is significantly higher than the 30% gain for AI chip pioneer Nvidia during this period. This impressive surge has brought Broadcom's market cap to roughly $1.3 trillion, and it wouldn't be surprising to see this semiconductor stock enter the $2 trillion market cap club in the next three years.
Let's look at the reasons why Broadcom seems capable of hitting that milestone by 2028.
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Broadcom's growth is likely to accelerate in the next three years
Broadcom released its fiscal 2025 second-quarter results (for the three months ended May 4) last month. The chipmaker's revenue in the first six months of the fiscal year increased by 22% from the year-ago period to $29.9 billion. The impressive growth in sales of the company's AI chips plays a central role in driving this impressive growth.
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Key Data Points
Broadcom's AI chip revenue jumped 77% year over year in the fiscal first quarter, followed by a 46% increase in Q2. The company has sold $8.5 billion worth of AI chips in the first half of the year, which means that it is getting nearly 30% of its top line from this segment. Broadcom expects to sell $5.1 billion worth of AI chips in the current quarter, which would be a 60% jump from the year-ago period.
So, the company is on track to register a healthy jump in AI revenue compared to the previous fiscal year, when it sold $12.2 billion worth of AI chips. Importantly, Broadcom's AI revenue still has tremendous room for growth, thanks to a couple of factors.
First, the adoption of custom AI processors is increasing at a healthy pace. Major cloud computing companies such as Microsoft, Alphabet's Google, Amazon, and AI giants such as OpenAI are turning to custom chips to deliver cutting-edge performance to their customers at reasonable prices. Microsoft, for instance, released two in-house chips late last year to speed up AI workloads and improve the security of its data center infrastructure.
Google, on the other hand, revealed its Ironwood custom AI inferencing processor three months ago, delivering a significant increase in performance over its previous chips with the aim of running AI workloads in a cost-effective manner. Meanwhile, OpenAI is reportedly working with Broadcom to finalize the design of its custom AI chip.
Broadcom's client list for its custom chips now includes the likes of Meta Platforms, ByteDance, Alphabet, and OpenAI. The company is reportedly going to design chips for xAI, Oracle, and Apple as well. All these customers should expand Broadcom's annual serviceable addressable market well beyond the $60 billion to $90 billion range that the company is forecasting by fiscal 2027.
The second reason why Broadcom is on track to win big from the custom AI processor market is its solid market share in this space. The company reportedly controls 70% of this lucrative end market, and its growing customer base should allow it to sustain this healthy share in the future.
Not surprisingly, investment banking firm TD Cowen estimates that Broadcom's AI chip revenue could grow to $50 billion a year in 2027, which would be more than four times the revenue it generated from this segment last year. That could be sufficient for the company to get to a $2 trillion market cap. Here's why.
AI-fueled revenue growth could send Broadcom's market cap to $2 trillion
Broadcom finished fiscal 2024 with $51.6 billion in revenue, $12.2 billion of which came from AI. If the company's revenue from all other segments remains flat and it indeed generates $50 billion in AI revenue by 2027, its annual revenue could jump to just over $89 billion within the next three years. This is almost in line with what analysts are anticipating.
Data by YCharts.
However, the new AI customers that Broadcom is bringing on board could help it do better than that. But even if the company manages to achieve $89 billion in sales after three years and maintains its current price-to-sales ratio of 22.4, its market cap will hit almost $2 trillion. That points toward 60% gains from current levels.
Of course, Broadcom is trading at a premium valuation right now, and that seems justified considering the pace at which its AI revenue and clientele are growing. So, investors looking to buy an AI growth stock can still consider buying Broadcom even after the impressive gains that it has delivered in the past year, as it seems built for more upside over the next three years.
