When it comes to technology solutions, Broadcom (AVGO +0.88%) occupies a pivotal position in this ever-evolving landscape. The company's products underpin a wide swath of tech infrastructure, and the paradigm shift that is artificial intelligence (AI) has taken it to the next level.
Much to the delight of its shareholders, Broadcom continues to capitalize on this opportunity, which is driving its revenue and profits higher despite its position as a larger, slower-growth company. That essential ability has fueled its stock price, which has surged 468% over the past three years (as of this writing) and 109% over the past 12 months.
The company faces a key hurdle when Broadcom reports its fiscal 2025 third-quarter results after the market close on Sept. 4. Given the stock's blistering returns over the past year, should investors lay out their hard-earned money to jump on the bandwagon or wait until after this crucial financial report? Let's dig in to see what the evidence suggests.
Image source: Getty Images.
Let the chips fall where they may
Broadcom offers a wide range of technology solutions that permeate every corner of technology. The company offers a diverse range of software, semiconductor, and security products that cater to the broadband, mobile, cable, and data center industries. In fact, its products are so far-reaching that Broadcom notes that "99% of all internet traffic crosses through some type of Broadcom technology."
The advent of generative AI in late 2022 represented a sparkling new opportunity, and management wasted no time entering the fray. Broadcom designs custom application-specific integrated circuits (ASICs) to accelerate the processing of AI workloads. Furthermore, these power-miserly chips consume less energy, making them an attractive choice for cloud providers and data center operators. The company also offers an impressive array of networking solutions that help transport data around the ether.
This strategy has proven extremely profitable for Broadcom. In the second quarter (ended May 4), the company generated revenue of $15 billion, up 20% year over year, while its adjusted earnings per share (EPS) of $1.58 jumped 44%. Management noted that the surging growth was the result of strong demand for AI, as revenue related to the technology grew 46% to $4.4 billion, marking its ninth consecutive quarter of year-over-year growth. While sales of its AI chips grew by double digits, AI networking solutions soared 70%.
Management expects the company's growth streak to continue. For the third quarter, Broadcom is guiding for revenue of $15.8 billion, which would represent growth of 21%, resulting in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of roughly $10.43 billion, an increase of 27%.
It's also worth mentioning that Broadcom pays a modest dividend of $0.59 per quarter, with a current yield of about 0.8%. While that might seem like a pittance, that's the result of the surging stock price. Furthermore, with a payout ratio of 63% and increasing profitability, Broadcom has room to continue its 15-year streak of dividend increases.
Given the company's growing revenue and expanding profitability, the dividend is merely icing on the cake.
NASDAQ: AVGO
Key Data Points
Should you buy Broadcom stock now or wait until after earnings?
For investors looking to capitalize on the secular tailwinds resulting from AI, the future looks bright for the tech giant. This begs the question: Is it better to buy Broadcom stock now, or wait until after the company reports earnings?
While it's tempting to try to invest just before a catalyst like an earnings report, long-term investors would be better served by buying the stock and disregarding the daily machinations of the stock market. There's no way to know for sure whether Broadcom will meet Wall Street's rather arbitrary revenue and EPS targets or how investors will react on a particular day.
The quintessential investing question is whether Broadcom stock is a buy, and as the recent results show, there are plenty of reasons to be optimistic. Furthermore, Wall Street is extremely bullish, with 43 of the 47 analysts who offered an opinion in August rating the stock a buy or strong buy, and none recommending selling.
Management is equally optimistic and estimates the company's addressable market for AI revenue (from its three current hyperscale customers) is between $60 billion and $90 billion in fiscal 2027. Furthermore, the company announced in December that it is onboarding two new customers -- but management is keeping information about them close to the vest. It will likely take some time to bring those new clients up to speed, but Broadcom's future results will almost surely get a boost.
I'd be remiss if I didn't mention the stock's valuation, as Broadcom is currently selling for 37 times next year's expected earnings (as of this writing). While that might seem a bit on the high side, I'd suggest it's a fair price to pay given the preponderance of evidence.
Most experts concur that it's still early days for AI, but the size of the opportunity continues to increase. Big Four accounting firm PricewaterhouseCoopers (PwC) estimates AI's contribution to the global economy at $15.7 trillion between now and 2030. While the opportunity is vast, the truth is that no one can say how large it is, at least not with any certainty.
Given the company's previous track record of success, expanding revenue and profits, and growing opportunity, the evidence suggests Broadcom stock is a buy.
