Broadcom (AVGO 1.89%) has emerged as a key player in a market on track to reach into the trillions of dollars just a few years from now. I'm talking about artificial intelligence (AI), a technology that's drawn the interest and investment of customers across industries. They aim to use the power of AI to improve their operations and even develop better products and services. And all of this could fuel significant earnings growth.
Key tools involved in this are chips as well as networking equipment, and Broadcom is a major provider of both. In fact, sales of these products have helped supercharge the company's earnings in recent times -- and stock performance has reflected this strength. Over the past five years, Broadcom shares have soared more than 800%.
Moving forward, with the AI boom set to unfold over the long term, is Broadcom your ticket to becoming a millionaire? Let's find out.
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A networking giant
First, it's important to note that over time, Broadcom has built out a leading position in the world of networking. About 99% of all Internet traffic travels through a Broadcom chip, and the company makes thousands of products used in various key areas today -- from your smartphone to a data center.
And as interest in AI has gathered momentum in recent years, Broadcom has seen demand for its chips and networking equipment take off. Cloud service providers need this equipment to ramp up their data centers to better serve customers, and three major cloud customers have flocked to Broadcom for a type of chip that sets it apart from rivals.
Broadcom's XPUs are custom accelerators, meaning they are designed for specific applications -- this is compared to graphics processing units (GPUs) from others such as Nvidia and Advanced Micro Devices (AMD) that are high-powered for general purposes. Broadcom in the recent quarter said that in addition to its three big customers, a fourth has come along and placed a $10 billion order for Broadcom systems.
OpenAI and Broadcom
And last month, research lab OpenAI and Broadcom announced an agreement to deploy 10 gigawatts of accelerators together from next year through 2029. OpenAI also announced similar deals with Nvidia and AMD, suggesting each of these companies may play a valuable role in the AI infrastructure buildout. Even better, if Nvidia chief Jensen Huang is right and AI infrastructure spending reaches at least $3 trillion by the end of the decade, Broadcom has plenty of bright days ahead.
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Key Data Points
How has this demand translated into growth so far? Broadcom recently reported record third-quarter revenue as growth in its AI business soared 63% to more than $5 billion. This is the 10th straight quarter of growth, and Broadcom expects an 11th as it predicts fourth-quarter AI revenue of more than $6 billion. This is as customers continue to invest in chips and networking equipment.
It's also important to remember that Broadcom has grown profit over the years, into the billions of dollars -- and in the recent quarter reported net income on a GAAP basis of more than $4 billion.
Million-dollar potential?
Now, let's get back to our question: Considering all of these positive points, could Broadcom stock make you a millionaire? A look at the company's performance over the past five years offers us a clue: If you'd invested $10,000 in the stock five years ago, the total value of your investment including stock performance and dividend payments would be about $110,000. That's fantastic, but it's far from million-dollar territory.
This shows that it's very difficult for one stock alone -- unless you invest an enormous amount in it, and that's a risky move -- to make you a millionaire. What does that mean for you as an investor? This emphasizes the importance of buying a variety of quality stocks rather than focusing your attention and cash on only one or two.
Diversification lowers your risk and offers you a better chance of winning over the long term. And Broadcom, thanks to the strength of its products and the likelihood that high demand will continue, makes a great addition to such a portfolio -- together, with other quality stocks, Broadcom could be your ticket to millions.
