Among large-cap stocks in the artificial intelligence (AI) sector, Nvidia seems to have drawn the most attention. This is understandable, given its leadership in powering generative AI applications.
Nonetheless, this does not mean we should ignore other successes in the AI industry. Another top performer is Broadcom (AVGO -1.62%), which delivered a total return of 1,070% over the past five years, beating the S&P 500 (^GSPC 0.44%) by almost tenfold.
That took its market cap to around $1.7 trillion, achieving such growth in large part by offering companies an alternative to Nvidia. Given its success, investors should examine whether Broadcom's market-beating returns can continue.
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Understanding Broadcom as a business
Broadcom began as a semiconductor producer specifically geared to serve companies. It succeeded by locating engineers near its largest clients, and these personnel would collaborate with companies to develop specific solutions. Before the AI boom, one of its more notable products enabled Wi-Fi hotspots in Apple's iPhone.
A few years ago, it sought to diversify into software by buying up such companies. Among its capabilities are cybersecurity, networking, cloud infrastructure, and AIOps solutions.
That infrastructure software business made up 43% of the company's revenue in the third quarter of fiscal 2025 (ended Aug. 3), with semiconductor solutions responsible for 57% of revenue.
The semiconductor segment and the stock have risen amid the AI boom. It developed a specialty in custom ASIC and networking chips for hyperscale data centers, as well as networking gear and custom chips. On the infrastructure software side of the business, it designs software solutions through its recent acquisition, VMWare.
How it fared financially
Given the demand for these products, its financial growth appears to back up much of the increase in Broadcom's stock price. In the first three quarters of fiscal 2025, revenue of $46 billion increased by 22%. This included a 28% revenue increase for the infrastructure software segment and an 18% increase for semiconductor solutions.
The operating expense part of the income statement also looks promising. During the same period, research and development spending rose to $8 billion, up from $7.1 billion in the same year-ago period. This is encouraging, since it could lead to tech and AI breakthroughs in future quarters.
Despite that increase, Broadcom cut all other expense categories, leading to an 11% reduction in overall operating expenses. Thus, for the first nine months of fiscal 2025, net income surged to nearly $15 billion versus just $1.6 billion for the same period in fiscal 2024.
Additionally, investors can expect more of the same, as the $17.4 billion in revenue projected for fiscal Q4 amounts to a 23% increase if that forecast holds. Given that growth, one can understand the aforementioned gains in the stock price.
Unfortunately, that also means Broadcom stock has become significantly more expensive. Its P/E ratio now stands at 92, well above levels in late 2022, when it was below 20.
Although investors may look more favorably on the 53 forward P/E ratio, such valuations indicate the stock is no longer a bargain for investors. Also, it may be hard for Broadcom to have a similar increase in valuation over the next five years, making its future returns more uncertain.
Broadcom in five years
Despite that uncertainty, Broadcom stands a significant chance of achieving market-beating returns over the next five years.
Admittedly, investors should not expect another 1,070% return over that period. That would take its market cap to approximately $20 trillion, an unlikely feat in a market that has yet to see its first $5 trillion market cap.
Nonetheless, the AI-driven demand will likely continue for years to come, benefiting both its chip and software businesses. Even if that slows, rising AI demand makes double-digit revenue increases likely throughout this time. Such gains are less likely for the S&P 500 as a whole, making it likely Broadcom can beat that benchmark.
