"The times they are a-changin'," as Bob Dylan once sang.
Looking back over the past two decades, we see that a lot of what drives the U.S. economy has changed. For example, oil and industrial players were the largest companies in the U.S. in 2005 (measured by market cap), with ExxonMobil and General Electric clocking in at $392 billion and $375 billion, respectively.
Now, just 20 years later, the leader board has five technology stocks with market caps of more than $2 trillion each. AI chipmaker Nvidia recently took the crown as the world's first $4 trillion company. Microsoft and Apple have each topped the list at some point, currently sporting market caps of $3.7 trillion and $3.1 trillion, respectively. Rounding out the top five are Amazon and Alphabet, worth $2.3 trillion and $2.1 trillion, respectively.
With a market cap of roughly $1.3 trillion as of this writing, it seems it's only a matter of time before Broadcom (AVGO 0.48%) joins this elite group of companies. Broadcom plays a critical role in the AI ecosystem, and the prevailing secular tailwinds could help push it into the $2 trillion club sooner than you might think.
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A chip off the old block
Investors might be surprised to learn that Broadcom supplies a wide range of the semiconductor, software, and security solutions that underpin much of the technology in the mobile, broadband, cable, and data center spaces. The company boasts that "99% of all internet traffic crosses through some type of Broadcom technology." This highlights the company's critical role in the accelerating adoption of artificial intelligence (AI), which resides primarily in data centers and in the cloud.
Broadcom's overall results show that business is robust. In the second quarter, Broadcom generated record revenue that climbed 20% year over year to $15 billion, while its adjusted earnings per share of $1.58 jumped 44%.
The company added VMware to its list of bolt-on acquisitions in late 2023. Since then, management has been working to convert VMware Cloud Foundation (VCF) to a subscription licensing model and cross-selling its products to existing customers. The efforts are bearing fruit, as 87% of the company's 10,000 largest customers have adopted VCF. Furthermore, management noted that in Q2, its infrastructure software operating margin climbed to 76%, up from 60% in the year-ago quarter, and credited the "disciplined integration" of VMware for the improvement.
The path to $2 trillion
The extensive reach of Broadcom's tech-centric products, which are critical components in the cloud and hyperscale data center industry, make it a key player in the growing adoption of AI.
According to Wall Street estimates, Broadcom is expected to generate revenue of $62.74 billion in 2025, giving it a forward price-to-sales (P/S) ratio of roughly 20. If the stock's P/S remains constant, Broadcom will need to generate revenue of roughly $97 billion annually to support a $1 trillion market cap.
Wall Street's expectations are bullish, guiding for revenue growth of 19% annually over the coming five years. If the company hits those targets, it could achieve a $1 trillion market cap as early as 2028. Given the expanding use cases for generative AI, those estimates could well be conservative.
Furthermore, the evidence suggests Broadcom might achieve those benchmarks sooner than current forecasts suggest. Management estimates the company's serviceable addressable market for AI revenue from its three existing hyperscale customers at $60 billion to $90 billion in fiscal 2027 alone. Those estimates don't include the two new customers management announced in December -- which the company is currently being very tight-lipped about. While it will take some time to bring those new customers into the fold, Broadcom's growth will no doubt get a boost.
It's still early days for the adoption of AI, and Broadcom is well positioned to benefit from these gale-force secular tailwinds. It's estimated that the generative AI market will top out at between $2.6 trillion and $4.4 trillion annually over the coming decade, according to global management consulting firm McKinsey & Company. If you include the contribution from embedded software, that number doubles.
Broadcom's emergence as a key player in AI has driven the stock higher, resulting in a commensurate increase in its valuation, with the stock selling for 34 times next year's expected earnings.
That said, Broadcom has soared 2,070% over the past decade, compared to just 205% gains for the S&P 500 as of this writing, which helps illustrate why the stock is deserving of a premium.
